Rates and tone of MPC statement unchanged

As we expected, the Monetary Policy Council has left interest rates unchanged today (the reference rate amounts to 1.50%). The MPC maintained the view that "given the available data and forecasts, the current level of interest rates is conducive to keeping the Polish economy on the sustainable growth path and maintaining macroeconomic balance”. The press release also included the statement added after the February meeting concerning medium-term inflation outlook: "bearing in mind the external and most probably temporary nature of factors behind the increase in price growth as well as low domestic demand pressure, the risk of inflation persistently running above the target in the medium term is limited” (in the February press release this risk was assessed as "low”). This sentence can also be interpreted as a moderate – in the MPC opinion – probability of secondary inflationary effects caused by higher commodity prices (so-called second-round effects). This view is in line with the results of our analyses (see MACROmap of 20/2/2017).

Inflation and GDP projection revised upwards

As we expected, the inflation path in 2017 and 2018, forecasted in the March projection, has been revised upwards compared to the November projection. In accordance with the March projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 1.6% - 2.5% in 2017 (vs. 0.5 - 2.0% in the November projection), 0.9 - 2.9% in 2018 (vs. 0.3 - 2.6%), and 1.2 - 3.5% in 2019. This means that, according to the projection, inflation will continue to run clearly below the MPC inflation target (2.5%) in 2017 and 2018, namely in the policy-relevant horizon, and will attain this target no sooner than in 2019. In addition, according to the NBP projection, inflation will decrease in 2018 compared to 2017, due to the abatement of the high base effects for food and fuel prices. The forecasted in the projection GDP growth rate in 2017 and 2018 has also been raised. In accordance with the March projection, its growth rate will run with 50% probability between 3.4 and 4.0% in 2017 (vs. 2.6 - 4.5% in the November projection), 2.4 - 4.5% in 2018 (vs. 2.2 - 4.4%), and 2.3 - 4.4% in 2019.

NBP Governor turns more dovish

During the press conference, Adam Glapiński informed that currently in the Council "there is no intense discussion about rate hikes”. He believes that possible materialization of the macroeconomic scenario outlined in the projection would be an argument in favour of leaving interest rates unchanged until the end of 2018. In our view this suggests that NBP Governor has turned more dovish as in his so-far remarks he was stressing the need of maintaining the status quo until the end of 2017. In his view, the main risks to the March inflation projection are elections in France and fuel price developments. A. Glapiński emphasized that the prospect of MPC maintaining negative real interest rates for an extended period was no reason for concern.

NBP projection supports stable interest rates scenario

The results of the March NBP projection, suggesting moderate inflationary pressure in medium term, and today's remarks of A. Glapiński support our forecast of NBP rates (see MACROmap of 6/2/2017). According to our scenario, the Council will decide to start the monetary tightening cycle in June 2018 and interest rates hikes in 2018 will amount in total to 50bp. This means that in the coming months the NBP reference rate will continue to be negative in real terms while accommodative monetary policy will support the forecasted by us revival of investments and the accompanying acceleration of economic growth to 4.1% YoY in Q4 2017.

In our view, the MPC statement, results of the NBP projection, and remarks of the NBP Governor are slightly negative for PLN and bond yields.

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