NBP inflation projection rules out quick rate cuts

Interest rates remain unchanged

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, 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. The Council has concluded that inflation will be driven up by the growing prices of energy in the quarters to come, and consequently, price growth will run above the NBP inflation target of 2.5% +/- 1 pp. The Council expects it to return to the inflation target when the impact of higher prices of energy fades. The Council also 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.

NBP Projection: GDP growth and inflation will rise markedly in 2025

According to the July projection of the NBP prepared on the assumption of unchanged NBP interest rates and using the data available as of 14 June 2024, there is a 50-percent probability that inflation will be in the range of 3.1-4.3% in 2024 (vs. 2.8–4.3% in the March projection), 3.9-6.6% in 2025 (vs. 2.2-5.0%) and 1.3-4.1% in 2026 (1.5-4.3%). This means that inflation path for 2024 has been revised slightly upwards in comparison to the one presented in March. In our opinion, the adjustment mainly results from the NBP taking into account the partial discontinuation of measures protecting against the impact of growing energy prices from July 2024 until the end of the projection horizon. A strong inflation rise expected to take place in 2025 is surprising given the effects of high base for energy prices, and will require an in-depth analysis once the detailed projection results are published by the NBP. In accordance with the projection, there is a 50-percent probability that GDP growth will be in the range of 2.3-3.7% in 2024 (vs. 2.7-4.3% in the previous projection), 2.8-4.8% in 2025 (vs. 3.2-5.3%), and 1.9-4.3% in 2026 (vs. 2.0-4.5%). GDP growth path for 2024-2025 as presented in the projection has thus been adjusted downwards comparing to the March projection, which we believe was mainly caused by a lower starting point (economic growth in Q2 is likely to have been much slower than expected in the March projection). Therefore, the scenario presented in the NBP’s July projection is one of a marked acceleration of price growth in the quarters to come and inflation running well above the target until 2025. In accordance with the projection, such inflation profile will be seen together with economic growth acceleration in 2024-2025 followed by a significant slowdown of GDP growth in 2026.

Short-term inflation prospects rule out quick rate cuts

In our opinion, both the press release published after the MPC meeting and the results of NBP’s July projection strongly support our scenario of interest rate stabilisation in the quarters to come. We expect the first rate cut to take place in Q3 2025. We believe that the scale of inflation rise (we expect inflation to go up from 2.6% YoY in June to 4.4% in July, mainly as a result of the growth in prices of electricity and gas) and the answer to the question when inflation will reach the local peak (and where that peak will be) is of key importance for the tone of MPC press releases published after meetings and of the MPC members’ statements. In accordance with our forecast, inflation will go beyond 5% in September 2024 and reach its local peak at 5.6% in March 2025 (see MACROmap of 01/07/2024). Such an inflation path will be conducive to a rise in inflation expectations, which will give the MPC a strong argument in favour of keeping interest rates unchanged despite the expected return of inflation to the NBP target in 2026. A. Glapiński’s tomorrow’s press conference will likely tell us more about the outlook for the monetary policy.

In our opinion, the press release following today’s meeting of the Council and the results of the NBP’s July projection are slightly positive for the PLN and for the yields on bonds.