MPC accepts long-term elevated inflation

Interest rates remain unchanged

Today, the Monetary Policy Council has taken a decision to keep interest rates unchanged (with the NBP reference rate standing at 6.75%). The Council’s decision was consistent with market consensus and our forecast. Statements made by the NBP Governor and some of the MPC members, which suggested that they were reluctant to tighten the monetary policy despite high, persistent inflation, indicated that the rates were highly likely to remain unchanged. In the press release following the meeting, the Council has once again noted that “for several months commodity prices and PPI inflation have been decreasing, which signals a gradual easing of external supply shocks” and that “together with weakening economic activity, it will support a decline in domestic CPI inflation in the coming quarters.” The Council also noted that “the weakening of the external economic conditions (…) will continue to curb global inflation, which will contribute to lower price growth in Poland.” In the Council’s opinion, decline in domestic inflation will also be supported by “the weakening in GDP growth, including consumption, amid significant decrease in credit growth.” Like in February, also this time the Council concluded that “given strength and persistence of the recent shocks that remain beyond the impact of domestic monetary policy, inflation’s return to the NBP inflation target will be gradual.” The Council has once again declared that its “further decisions (…) will depend on incoming information regarding perspectives for inflation and economic activity.”

NBP Projection: Inflation’s return to target still a long way off

According to the March projection of the NBP prepared on the assumption of unchanged NBP interest rates and using the data available as of 28 February 2023, there is a 50-percent probability that inflation will be in the range of 10.2-13.5% in 2023 (vs. 11.1–15.3% in the November projection), 3.9-7.5% in 2024 (vs. 4.1-7.6%) and 2.0-5.0% in 2025 (2.1-4.9%). The near-term inflation path projection was thus slightly revised downward vs. the projection presented in November. This indicates that we will see a two-digit average annual inflation in 2023. 2024 will see the inflation still running markedly above the MPC’s inflation target of 2.5%, and it will be only the second half of 2025 that will see the inflation return to the target. The long-way-off return to the inflation target supports our conclusion, which says the Council still believes the outlook for the economic growth is more important than the level of inflation in the medium term. In accordance with the projection, there is a 50-percent probability that GDP growth will be in the range of -0.1-1.8% in 2023 (vs. -0.3-1.6% in the November projection), 1.1-3.1% in 2024 (vs. 1.0-3.1%), and 2.0-4.3% in 2025 (vs. 1.8-4.4%).Therefore, the scenario as seen in this projection is that of a slightly higher economic growth (comparing to the November projection) that will reach the value of around 1% in 2023, and then gradually accelerate in the subsequent years.

The Council accepts long-term elevated inflation

The lack of any monetary policy reaction to the March inflation projection pointing to a long-term persistence of inflation on a level that is markedly above the NBP inflation target and well beyond the monetary policy transmission horizon means that the Council still finds high inflation to be of secondary importance and that preventing the economic growth from slowing down too much in the coming quarters is still the main objective of the monetary policy. We continue to believe that the probability of the Council resuming interest rate hikes in the coming months is still low. We believe that the Council might signal the end of the hiking cycle, which will be reflected by the change in the tone of the press release published after the meeting and in the NBP Governor’s statements as early as in Q2 2023, but it will depend on how much the inflation will drop in the coming months.

We maintain our forecast in which the NBP interest rates will not change until the end of 2023 despite temporary inflation rise to 18.8% YoY, which we expect to have taken place in February 2023. This is because the significant inflation rise in February will be combined with further GDP growth decline to -0.8% YoY vs. 2.0% in Q4 2022. The high and growing inflation in February combined with the incoming data that are indicative of a GDP decline in Q1 in both annual and quarterly terms will be used by the Council as an argument to keep the interest rates unchanged. Tomorrow’s press conference of the NBP President will tell us more about the short-term outlook for interest rates.

In our opinion, the press release following today’s meeting of the Council will be neutral for the PLN and for the yields on bonds.

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