Inflation on the rise, interest rates remain unchanged

Interest rates remain unchanged

Today, the Monetary Policy Council has taken a decision to keep interest rates unchanged, with the NBP reference rate standing at 5.75%. The MPC’s decision was consistent with market consensus and our forecast. Our forecast was underpinned by a marked inflation rise, which went up from 4.3% YoY in August to 4.9% in September in accordance with the flash estimate published by the GUS (see MACROmap of 30/09/2024). In today’s press release, the Council repeated that “despite the observed economic recovery, demand and cost pressures in the Polish economy remain relatively low, which amidst weakened economic conditions and lower inflation pressure abroad curbs domestic inflation pressure.” In the Council’s opinion, inflationary pressure is strengthened by a marked rise in wages. According to the Council, inflation is being substantially driven up by growing energy prices and once the impact of this factor fades, inflation should converge to the inflation target. The Council once again stressed the uncertainty arising from the impact of higher energy prices on the inflation expectations, and repeated its opinion regarding the adequacy of the current level of interest rates, which “is conducive to meeting the NBP inflation target in the medium term.” The Council’s opinion regarding the future level of interest rates, which “will depend on incoming information regarding prospects for inflation and economic activity”, has also been repeated in the press release.

Interest rate stabilisation as the most likely scenario for the quarters to come

The wording of the press release published after the MPC meeting supports our scenario of interest rate stabilisation in the quarters to come. We continue to believe that the rates will be cut for the first time in Q3 2025. In our opinion, the data regarding the level and the structure of inflation, and particularly the data for core inflation, which we estimate to have gone up from 3.7% YoY in August to 4.3% in September, will be of key importance for the short-term outlook for interest rates. In our opinion, the short-term scenario that is most likely to occur, with inflation reaching its local peak above 5% in Q1 2025, does not leave too many options on the table for the Council. In Q2 2025, inflation will run somewhere around 5%, and core inflation will still stay above 4%, which will give the Council a reason to postpone the rate cuts amidst the expected acceleration of economic recovery. Furthermore, inflation expectations will be raised by further acceleration of food price growth, which we expect to see in the coming quarters. However, taking into consideration recent statements made by the NBP Governor, we cannot rule out that the rate cut cycle will begin in Q2 when inflation ceases to rise and when forecasts indicate at a substantial, lasting, high-base-effect-driven inflation fall in Q3. Bearing in mind the expected rate cut continuation from the Fed and the ECB, we can expect the rates in Poland and developed countries to start diverging increasingly, which will be conducive to the PLN appreciation, and will make the Polish currency less susceptible to volatility connected with the growing geopolitical risk caused by the situation in the Middle East. A. Glapiński’s tomorrow’s press conference will probably tell us more about the outlook for the monetary policy.

In our opinion, the press release following today’s meeting of the Council will be neutral for the PLN and for the yields on bonds.