MPC statement: inflation will meet the target in the medium term

As we expected, the Monetary Policy Council has left interest rates unchanged today (the reference rate amounts to 1.50%). 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, while at the same time enabling to meet the inflation target in the medium term”. Like the month before the Council expects that “in the coming quarters, the annual inflation may remain above the upper bound for deviations from the inflation target due to supply-side and regulatory factors, i.e. ones remaining beyond the direct influence of domestic monetary policy. As the impact of these factors fades and GDP growth weakens, inflation will gradually decrease. In the monetary policy transmission horizon inflation will be close to the target. Such assessment is supported by the results of the March projection of inflation (see below).

The March NBP projection: inflation revised upwards, GDP growth downwards

The inflation path in the 2020-2021 period, forecast in the March projection, has - compared to the November projection - been revised upwards. In accordance with the projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 3.1%-4.2% in 2020 (vs. 2.1%-3.6% in the November projection), 1.7%-3.6% in 2021 (vs. 1.6%-3.6%), and 1.3%-3.4% in 2022. This means that, according to the projection, inflation in the 2020-2022 will run close to the MPC inflation target. The March projection maintained the downward trajectory of GDP growth rate in subsequent years and revised it downwards compared to the path presented in November. The GDP growth rate forecast in the projection will run with 50% probability between 2.5%-3.9% in 2020 (vs. 2.7%-4.4% in the November projection), 2.1%- 3.9% in 2021 (2.3%-4.2%), and 1.8%-3.7% in 2022.

The NBP Governor is lowering the expectations of interest rate cuts

At the conference after the MPC meeting, the NBP Governor, A. Glapiński did not explicitly inform if the March projection had factored in the impact of the coronavirus epidemic on the forecasts it presented. As the projection was prepared based on data and information published before 18 February, we believe that it has reflected the impact of the epidemic to a limited extent. The NBP Governor indicated during the conference that “the panic related to the coronavirus epidemic carries some risk of a downturn”. He also added that it was currently difficult to assess the scale of that risk.

The NBP Governor was trying to lower the markets’ expectations of interest rate cuts in Poland. He said that if the macroeconomic scenario presented in the projection, assuming i.a. the dying out of shocks which boosted inflation, materialized, then, in his opinion, interest rates would most probably remain stable until the end of the term of the Monetary Policy Council (the beginning of 2022). The MPC members present at the conference - G. Ancyparowicz and R. Sura – also pointed to a high likelihood of interest rates remaining unchanged in the coming quarters.

In the context of the impact of the coronavirus epidemic on the outlook of the monetary policy, A. Glapiński emphasized considerable uncertainty about the scale of that impact on the economic situation in Poland. He pointed out that potential easing of monetary policy by the MPC would have a limited impact on GDP growth in Poland. He also pointed out that possible monetary easing by the ECB would not cause the MPC to follow suit.

Interest rates unchanged at least until the end of 2021

Today's remarks of Council members support our scenario, in which NBP interest rates will remain unchanged at least until the end of 2021 despite a potentially negative impact of the coronavirus on the economic activity in Poland. A more thorough assessment of the outlook for the monetary policy in Poland will be possible after seeing the full results of the March inflation projection to be released on Monday.

In our view, the statement after the MPC meeting and the remarks of the NBP Governor at today’s conference are positive for PLN and bond yields.

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