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MPC braced for inflation going up above the inflation target

Today, the Monetary Policy Council has taken a decision to keep the interest rates unchanged (with the NBP reference rate standing at 5.75%). The MPC’s decision was consistent with market consensus and our forecast. In today’s press release published after the meeting, the MPC referred to April’s inflation rise reported in the GUS’s flash estimate (see MACROmap of 06/05/2024), noting that the inflation had been driven primarily by the restoration of the higher VAT on foods and by higher fuel prices. The Council also noted that core inflation fell once again in April, but then emphasised that the growth in the prices of services is still relatively strong. In today’s press release, the Council was a little bit more specific as regards its members’ expectations concerning the short-term inflation outlook. In the Council’s opinion, “in 2024 Q2 annual CPI growth will run at the level consistent with the NBP inflation target”, while in the previous press release, the MPC was saying that it would happen “in the coming months.” This opinion is consistent with the Council’s earlier conclusions, which said that inflation running close to the MPC’s inflation target (2.5%) as seen recently would not last long. The Council has once again emphasised the uncertainty connected with the short-term inflation outlook. In the press release, the MPC repeated that “should energy prices be raised, inflation might increase significantly in the second half of 2024.”

Subsequent inflation rise as an argument in favour of keeping the interest rates unchanged

The Council further repeated that “the current level of NBP interest rates is conducive to meeting the inflation target in the medium term”, and that the Council’s “further decisions will depend on incoming information regarding perspectives for inflation and economic activity.” In our opinion, in the nearest future, the MPC members will keep on emphasising that inflation is highly likely to rise substantially in H2 2024 amidst the accelerating recovery and the discontinuation of protective measures for energy prices. We believe that the MPC will consider the unfavourable short-term inflation outlook to be the main argument against cutting the interest rates. This is consistent with our scenario of interest rates remaining unchanged until H2 2025. The scenario is supported by the expected inflation rise, which, having reached a local peak in March 2024, will go up above the upper limit for deviations from the target (3.5%) again in H2 2024, and will stay there until June 2025, inclusively. 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 is neutral for the PLN and for the yields on bonds.