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. The press release following the June’s meeting of the MPC has not changed much, either, comparing to the one published in May. In the press release following the meeting, the Council referred to the inflation drop in May, and in particular to the expected “significant” decrease in core inflation. The Council noted that “despite weakening demand growth, (…) the level of inflation was still affected by a significant increase in costs resulting from an earlier strong surge in global commodity prices and disruptions in global value chains that was passed through to consumer prices.” The Council has repeated that the decreasing commodity prices and a slower growth of producer price index together with lower economic activity growth “will support a decline in domestic CPI inflation in the coming quarters.” Like in May, 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.”

Inflation still of secondary importance

The Council has repeated that “the earlier strong monetary policy tightening undertaken by NBP will lead to a decline in inflation in Poland towards the NBP inflation target.” The Council has concluded that inflation will be driven down by the weakening of the external economic conditions, a decline in commodity prices, and a weaker GDP growth (including consumption) amid a significant decrease in credit growth. The Council has once again declared that its “further decisions (…) will depend on incoming information regarding perspectives for inflation and economic activity.” We have concluded that the text of the message suggests, like in the previous months, 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.

Will the July projection give reasons to signal the end of the hiking cycle?

We believe that the likelihood of the Council signalling the end of the hiking cycle is growing as the core inflation is continuing to fall (the fall having been noted also in today’s press release). This change, reflected in a clear change in the tone of the message released after the meeting and in the NBP Governor’s statements, may take place in July 2023, but whether it will happen or not will depend on the June inflation data and July’s NBP projection results. This topic is most likely to be raised during tomorrow’s press conference of the NBP Governor.

We still maintain our scenario in which the NBP interest rates will not change by the end of 2023. It is consistent with our scenario which says that inflation will follow a mild downward trend in the months to come, reaching 7.0% YoY in December 2023. In our opinion, the room for reducing interest rates in H2 2023 will be highly limited amidst the expectations for recovery in the economic activity, which will be even stronger in 2024 (see MACROmap of 05/06/2023) and will drive the wage and inflation pressure up.

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

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