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Interest rate stability supports strengthening of PLN

Interest rates remain unchanged

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. In the press release following today's meeting, the Council reiterated the uncertainty regarding the short-term inflation outlook. The MPC maintained its assessment that “should higher VAT on food products be restored and energy prices raised, inflation might increase significantly in the second half of 2024”. According to the Council, “demand pressure in the economy will be stimulated by wage growth, stemming i.a. from wage increases in the public sector”. The Council also indicated that “in the coming months annual CPI growth will run at the level consistent with the NBP inflation target”, although “the decline in core inflation will be slower and core inflation will remain above CPI inflation”. The wording of the press release thus indicates that the Council, similarly to the previous month, believes that the expected continued and substantial drop in inflation in H1 2024 will only be temporary.

Markedly asymmetric balance of risk for inflation in March projection

In line with the NBP’s March projection, prepared under the assumption of unchanged NBP interest rates and taking into account data available until 15 February 2024, there is a 50-percent probability that the annual price growth will be in the range of 2.8 – 4.3% in 2024 (vs. 3.2 – 6.2% in the November 2023 projection), 2.2 – 5.0% in 2025 (vs. 2.2 – 5.3%) and 1.5 – 4.3% in 2026. Thus, the inflation path expected in the projection for 2024 has been significantly revised downwards (by around 1.1 pp) compared with the November forecast. Such a substantial revision is attributable to a lower starting point for inflation (likely to be significantly below November’s projection in Q1 2024) and the NBP’s assumption that shielding measures on energy and food prices will be maintained in their present form throughout the projection horizon. However, we believe this scenario is highly unlikely as these measures contribute to a significant increase in the public sector deficit. In our opinion, their scale will likely be gradually reduced in the coming quarters, leading to a markedly asymmetric balance of risk for inflation, as noted by the Council in its press release. The MPC highlighted that in the case of 2024, the probability that the annual price growth will run above the 50-percent confidence interval is 43%, while the probability that it will run below this range is 7%. In our opinion, the assumption that shielding measures will be maintained throughout the projection horizon significantly reduces its utility as a basis for informing monetary policy decision. This assessment also applies to the expected inflation projection for 2026, which is close to the NBP's inflation target. In our opinion, the inflation predicted in the projection in 2026 would be higher under conditions of gradual withdrawal of shielding measures and would therefore be well above the inflation target.

According to the projection, there is a 50-percent probability that GDP growth will be in the range of 2.7 – 4.3% in 2024 (vs. 1.9 – 3.8% in the November 2023 projection), 3.2 – 5.3% in 2025 (vs. 2.4 – 4.7%) and 2.0 – 4.5% in 2026. The projected GDP growth path for 2024-2025 has thus been noticeably raised compared to the November projection. However, it should be noted that the higher expected GDP growth rate in 2024 is most likely a result of the lower expected inflation path, contributing to a significant increase in consumption growth.

Interest rate stability supports strengthening of PLN

The wording of the press release following the MPC meeting and the results of the March NBP inflation projection are consistent with our scenario assuming interest rates will remain stable until H2 2025. This scenario is supported by previous statements from the NBP President, which signal a low probability of interest rate cuts in the coming quarters, as well as the ruling coalition’s planned motion to hold NBP President Adam Glapinski accountable before the State Tribunal by the end of March (see MACROmap of 26/02/2024). Furthermore, despite the anticipated quick decline in inflation in the first half of this year, the MPC is unlikely to reduce interest rates due to continued uncertainty regarding the inflation trajectory in the latter half of the year as shielding measures for food and energy prices are expected to expire, and a forecasted rebound in economic growth amid rapid wage increases, which will serve as an additional inflationary factor. 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. The higher interest rate trajectory in Poland, coupled with the release of funds under the National Recovery Plan, supports our forecast of a gradual appreciation of the PLN (see MACROmap of 4/03/2024). Tomorrow, A. Glapinski 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.