March projection postpones the return of inflation to its target

Interest rates remain unchanged

Today, the Monetary Policy Council has decided to keep interest rates unchanged, with the NBP reference rate remaining at 5.75%. The MPC’s decision was consistent with the market consensus and our forecast. The post-meeting press release maintained a slightly hawkish tone. The Council once again noted that inflation in major developed economies remains slightly above central banks’ targets, and maintained its assessment that “inflation this year will be markedly above the NBP inflation target, driven by the effects of the already introduced increases in energy prices, rises in excise duties and administered services prices, as well as the further unfreezing of energy prices in the second half of 2025.” The press release also contained a passage saying that “the outlook for economic activity and inflation around the world is fraught with uncertainty, which is related to, among others, changes in trade policies”, making a reference to the growing tensions in global trade, which are connected with D. Trump administration’s tariff policy to a considerable extent. The Council also repeated its assessment regarding the future level of interest rates, which “will depend on incoming information regarding prospects for inflation and economic activity”.

March projection postpones the return of inflation to its target

In accordance with the NBP’s March projection, which starts from the assumption that the NBP will not change its interest rates and is based on data covering the period up to 27 February 2025, there is a 50-percent probability that the annual price growth will be in the range of 4.1%-5.7% in 2025 (4.2%-6.6% in November 2024 projection), and 2.0%-4.8% in 2026 (1.4%-4.1%) and 1.1%-3.9% in 2027. Consequently, the inflation path for 2025 has been revised downwards from the November projection. This happened due to the government keeping the energy prices frozen (the November projection assumed they would be released at the beginning of 2025), and because the PLN-nominated prices of oil in the global market dropped markedly, which is conducive to a stronger-than-expected drop in the prices of fuels. As regards 2026, inflation forecast has been revised markedly upwards due to low base effects of 2025. Consequently, the projection shows a picture of inflation returning to the target set by the MPC only in 2027, with mean forecast for 2027 pencilled in at 2.5%. It is worth noting that the forecasts are based on the assumption of interest rates remaining stable across the projection horizon, which we believe does not leave much room for interest rate cuts. In accordance with the projection, there is a 50-percent probability that the GDP growth will be in the range of 2.9%-4.6% in 2025 (vs. 2.4%-4.3% in November 2024 projection), 1.9%-4.0% in 2026 (vs. 1.7%-4.0%) and 1.1%-3.5% in 2027. This means that the GDP growth forecast for 2025-2026 has been revised slightly upwards from the November projection, which we think was mainly due to the higher starting point arising from better-than-expected GDP data for Q4. Consequently, the GDP growth scenario outlined in the projection implies that the economic growth will gradually accelerate in 2025, which is consistent with our expectations.

No change to our interest rate forecast

The wording of the press release published after the MPC meeting and the results of the March projection are consistent with our scenario of interest rate stabilisation in the coming months, which is also underpinned by our short-term inflation forecast, which predicts that the growth rate of prices will remain close to 5% YoY until June 2025. We stand by our forecast that the first rate cut should be expected in Q3 2025, i.e. in the period when inflation will go down substantially due to the high base effect and print somewhere around 3.5%, which is the upper limit for deviations from the MPC inflation target (2.5% +/- 1 pp.). Although the March projection shows that inflation will draw closer to the inflation target only in early 2027, we believe that this arises from the NBP’s assumption that energy price controls will be lifted in H2 2025. In our opinion, though, energy prices will rise only in Q1 2026, and not as much as the NBP predicts, and this is the reason why we anticipate inflation to drop strongly in H2 2025. Thus, we do not treat the results of the March projection as an argument in favour of the upward revision of our interest rate path. Tomorrow’s press conference by A. Glapiński will probably offer more clarity about the monetary policy outlook. We expect the conference to have a hawkish tone.

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