MPC noted the impact of higher energy prices on the inflation outlook

As we expected, the Monetary Policy Council has left interest rates unchanged today (the reference rate amounts to 1.50%). In the statement after the meeting, the Council repeated the view that "the current level of interest rates is conducive to keeping the Polish economy on a sustainable growth path and maintaining macroeconomic stability”. The MPC statement also included the view that "current information and the results of the projection point to a relatively favourable outlook for economic conditions in Poland, although a gradual slowing in GDP growth is expected in the years ahead”. In the Council's assessment, in line with the November projection, "inflation in 2019 will probably exceed 2.5%, boosted, among others, by a rise in energy prices remaining beyond the impact of monetary policy, but will remain within a band for deviations from the target. In the medium term, in turn, the expected slowdown in economic growth will have a dampening effect on inflation. In effect, in the monetary policy transmission horizon inflation will remain close to the target”.

NBP projection: higher inflation and moderate slowdown of economic growth

As we expected, the inflation path in 2019, forecast in the November projection, has - compared to the July projection - been visibly revised upwards, mainly due to the expected dynamics of energy prices. In accordance with the projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 1.7% - 1.9% in 2018 (vs. 1.5% - 2.1% in the July projection), 2.6% - 3.9% in 2019 (vs. 1.9 – 3.5%), and 1.9% - 3.9% in 2020 (vs. 1.7-2.9%). This means that, according to the projection, inflation will visibly exceed the MPC inflation target (2.5%) in 2019. In addition, the inflation in 2019, as anticipated by the projection, runs clearly above our forecast (see MACROmap of 22/10/2018). In accordance with the projection, in 2020 the MPC target will be visibly exceeded, however inflation will run within the tolerance band (1.5% - 3.5%). As we expected, the November projection upheld the downward trajectory of GDP growth rate in subsequent quarters. The GDP growth rate forecast in the projection will run with 50% probability between 4.4% - 5.2% in 2018 (vs. 4.0 – 5.2% in the July projection), 2.7% - 4.4% in 2019 (vs. 2.8 - 4.7%), and 2.3% - 4.2% in 2020 (vs. 2.4-4.3%). Thus, the NBP is painting a scenario of inflation increasing above the inflation target over the entire projection period amid slight slowdown of economic growth, whose profile resembles that forecast in the July projection.

NBP Governor: the rise in energy prices assumed in the projection for 2019 is very conservative

At the conference after the MPC meeting, A. Glapiński repeated the view concerning possible changes in interest rates in 2019. In his opinion, in the light of the November inflation projection "there are no reasons for interest rates to change in 2019”. He said at the same time that "unless some new elements appear” the rates could remain stable also in 2020 (at the conference in October he informed that in assessing the rate outlook he "wouldn't like to be forward looking into 2020”)

The NBP Governor informed that the main reason for the significant increase in inflation forecast in the projection for 2019 was the fact that it reflected the impact of the expected strong rise in energy prices on the prices of consumer goods and services. In his opinion, the projection was based on a very conservative assumption concerning the rise in the prices of electricity for households, which has substantially raised the forecast of inflation. We are interpreting this remark as a signal of a significant downside risk to the 2019 inflation projection. We will be able to verify this view after seeing projection detailed results next week. It is in line with our inflation forecast assuming no rises of electricity prices for households in 2019. A. Glapiński also stressed a demand (cost)-like nature of the inflation impulse related to the expected rise in electricity prices which will result from the decision of the Polish Energy Regulation Office. He emphasized that its reason was "external" (it did not result from excessive demand) and therefore the MPC should not react to the increase in inflation it caused. In his opinion such reaction would be justified by an increase in inflation expectations and wage-price spiral (faster growth of unit costs of labour) involved. However, in the opinion of the NBP Governor, the wage growth rate "gives no reason for concern”. Present at the conference MPC members J. Osiatyński and R. Sura have shared this view.

NBP rates unchanged until March 2010

Today's remarks of A. Glapiński are consistent with our scenario, in which NBP interest rates will remain unchanged until the end of 2019 (first hike by 25 bp in March 2020). Current market expectations point to first interest rate hike in Q4 2019.

In our view, today's remarks of the NBP Governor are slightly negative for PLN and bond yields.

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