Interest rates remain unchanged
Today, the Monetary Policy Council has decided to keep interest rates unchanged, with the NBP reference rate standing at 5.75%. The MPC’s decision was consistent with the market consensus and our forecast. Our forecast was supported by persistently elevated inflation in November, which, according to preliminary data from the GUS, declined from 5.0% YoY to 4.6%, although this reduction will likely be short-lived. In today’s press release, the Council repeated that “demand and cost pressures in the Polish economy remain relatively low, which amidst weakened economic conditions and lower inflation pressure abroad curbs domestic inflation pressure”. The Council has again cited marked growth in energy prices and wages, as well as regulatory changes as factors driving inflationary pressure up. The Council also pointed out that “in the coming quarters inflation will remain markedly above the NBP inflation target, driven by the effects of the earlier increase in energy prices, as well as planned increases in excise duties and administered services prices”, signalling a shift in its inflation outlook compared to November as the press release issued after last month’s MPC meeting referred to “an elevated level of inflation in the coming quarters”. The Council also highlighted uncertainty factors related to the timeline for inflation returning to the target, linked to the evolution of energy prices, which are expected to be unfrozen in H2 2025, and the impact of a higher energy price growth rate on inflation expectations. According to the Council “in the medium term – under the current NBP interest rates level and amid the expected gradual decline in wage growth – inflation should return to the NBP target”, which aligns with the NBP’s November projection (see MACROpulse of 06/11/2024). The Council also reiterated its opinion regarding the future level of interest rates, which “will depend on incoming information regarding prospects for inflation and economic activity”.
Rate cut in Q2 or Q3 2025?
The wording of the press release published after the MPC meeting is consistent with our scenario of interest rate stabilisation in the quarters to come. This scenario is also supported by our short-term inflation forecast, which predicts that the growth rate of prices will remain close to 5% YoY until June 2025, despite the anticipated freeze on energy prices in this period. We believe inflation will peak locally in March 2025 (our updated inflation forecast covering 2026 will be presented in the upcoming MACROmap). We stand by our forecast that the first rate cut should be expected in Q3 2025, i.e. in the period when inflation will go down substantially due to the high base effect and print somewhere around 3.5%, which is the upper limit for deviations from the MPC inflation target (2.5% +/- 1 pp.). This scenario is consistent with our revised forecast for the PLN rate, which predicts a notable depreciation in Q1 2025 as the new D. Trump administration seeks to reduce US support for Ukraine and quickly broker a ceasefire (see MACROmap of 02/12/2024). While a potential resolution of the conflict could stabilise financial markets in the long term, the processes leading to such an agreement are likely to cause an escalation of military hostilities as both sides attempt to strengthen their negotiating positions. Such an escalation would trigger increased volatility in the financial markets.
Do MPC members support the November inflation projection?
However, it cannot be ruled out that the rate cut cycle will begin in Q2 2025 when inflation ceases to rise and when forecasts indicate substantial, lasting, high-base-effect-driven inflation fall in Q3. Recent statements by the NBP Governor and certain MPC members indicate a likelihood of this scenario. However, it is worth noting that an in-depth evaluation of the November NBP inflation projection (prepared under the assumption of unchanged interest rates until the end of 2026), indicating a return of inflation to the MPC target in H2 2026 leaves no room for any cuts throughout the projection horizon. This suggests that some MPC members do not fully align with the results of the November inflation projection, which they consider to overestimate inflationary pressures until 2026. Tomorrow’s press conference by A. Glapiński will probably offer more clarity about the monetary policy outlook.
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.
