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Council awaits March NBP projection

MPC concerned about anticipated renewed rise inflation

Today, the Monetary Policy Council decided to maintain the NBP reference rate at 5.75%. The Council’s decision is consistent with our forecast and the market consensus. The press release following the January meeting indicated a high likelihood of the MPC making this decision, citing the uncertainty surrounding the impact of future fiscal and regulatory policies on inflation, as well as the pace of economic recovery in Poland, as the main reasons for stabilising interest rates. The press release following today’s meeting included new sections suggesting that “should higher VAT on food products be restored and energy prices raised, inflation might increase significantly in the second half of 2024” and that “demand pressure in the economy will be stimulated by elevated growth in nominal wages, stemming i.a. from wage increases in the public sector”. In this context of particular note is the Council's declaration that “the NBP will continue to take all necessary actions in order to ensure macroeconomic and financial stability, including above all to bring inflation down sustainably to the NBP inflation target in the medium term,” where the word “sustainably” was added. We believe that this way the Council wanted to emphasize that the anticipated decline in inflation in the upcoming months (according to our forecast it will fall below the inflation target – see below) will be temporary due to the expected phase-out of protective measures related to food and energy prices.

Council awaits March NBP projection

The Council also highlighted the relatively low GDP growth in Poland in Q4 2023. The press release noted the ongoing slowdown in GDP growth in the Eurozone, including recessionary trends in Germany. The MPC also mentioned the high uncertainty regarding the economic growth prospects in key economies. Regarding inflation data, the Council referenced December's figures, due to the absence of the GUS's preliminary inflation data for January. It further clarified that "in Q1 2024, annual CPI growth is likely to fall significantly, while the decline in core inflation will be slower” (in January’s press release this assessment also applied to subsequent quarters). Therefore, due to high uncertainty, future monetary policy decisions will likely depend on the results of the March NBP projection.

Potential interest rate cut in March?

According to our forecast, headline inflation is expected to temporarily dip below the inflation target (2.5% YoY) between March and May this year (see MACROmap of 05/02/2024). We believe that the relatively low inflation projected for the first half of 2024, significantly below the November projection path, will encourage the MPC to resume its monetary easing cycle. We predict that the Council will cut interest rates by 25bp in March and July this year. The main risk factor to our forecast is today's press release signalling the Council's reluctance to ease the monetary policy, tied to the anticipated temporary dip in inflation towards the MPC's target. The scope for larger cuts seems limited due to our expectation of a rebound in inflation in the second H2 2024. We believe that this scenario will be outlined in the March NBP inflation projection. Therefore, the MPC's inclination to reduce interest rates in the context of inflation significantly surpassing the target will remain subdued in the forthcoming quarters. Our interest rate scenario for Poland aligns with the expected trajectory of the ECB’s monetary policy, which is set to begin an easing cycle in September 2024. Tomorrow, A. Glapiński will hold a press conference which will probably shed more light on the monetary policy outlook.

In our opinion, the wording of the press release following today’s MPC meeting is neutral for the PLN exchange rate and yields on bonds.