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 5.75%. The MPC’s decision was consistent with market consensus and our forecast. Our forecast was underpinned by inflation, which went up again in line with the flash estimate published by Statistics Poland, from 4.9% YoY in September to 5.0% in October (see MACROmap of 4/11/2024). 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 once again pointed to a marked growth in energy prices and wages and to regulatory changes as factors that drive the inflationary pressure up. In the Council’s view, if energy prices were to be raised in early 2025, this would drive the inflation up. The Council once again stressed the uncertainty arising from the impact of higher energy prices on the inflation expectations, and repeated its opinion regarding the adequacy of the current level of interest rates, which “is conducive to meeting the NBP inflation target in the medium term.” In the Council’s view, “when the effects of the energy price increase fade and amidst the expected slower wage growth – under the current NBP interest rates level – inflation should return to the medium-term NBP target.” The Council’s opinion regarding the future level of interest rates, which “will depend on incoming information regarding prospects for inflation and economic activity”, has also been repeated in the press release.
NBP Projection: Slower GDP growth with inflation not returning to its target earlier than in 2026
According to the November NBP projection prepared on the assumption of unchanged NBP interest rates and using the data available as of 22 October 2024, there is a 50-percent probability that inflation will be in the range of 3.6-3.7% in 2024 (vs. 3.1–4.3% in the July 2024 projection), 4.2-6.6% in 2025 (vs. 3.9-6.6%) and 1.4-4.1% in 2026 (1.3-4.1%). This means that inflation path for 2025 has been revised slightly upwards in comparison to the one presented in July. However, the Council emphasised that the outlook for energy prices for households as set out in the projection would be that the prices would be further released at the beginning of 2025. In our view, such a scenario is rather unlikely in the light of statements made by the government’s representatives, and we expect inflation to print at 4.3% YoY in 2025, i.e. markedly below the NBP projection figure. It is also worth noting that, in accordance with the projection, inflation still should not be expected to return to the MPC target earlier than in 2026, and that the return would occur provided that the interest rates remained stable until the end of 2026, which indicates that the room for cuts is actually limited. As regards the GDP, in accordance with the projection, there is a 50-percent probability that GDP growth will be in the range of 2.3-3.1% in 2024 (vs. 2.3-3.7% in the July 2024 projection), 2.4-4.3% in 2025 (vs. 2.8-4.8%), and 1.7-4.0% in 2026 (vs. 1.9-4.3%). GDP growth path for 2024-2025 as presented in the projection has thus been adjusted substantially downwards comparing to the July projection, which we believe was mainly caused by a lower starting point (in our opinion, economic growth in Q3 would be 2.7% YoY vs. 3.1% expected in the July projection). Consequently, the GDP growth scenario outlined in the projection implies a marked slowdown in H2 2024 followed by a substantial acceleration in 2025. Such scenario is consistent with our expectations.
US presidential election outcome conducive to interest rate stabilisation in Poland
The wording of the press release published after the MPC meeting and the results of the November NBP projection underpin our scenario of interest rate stabilisation in the quarters to come. The scenario is underpinned by our short-term inflation forecast of around 5% YoY until June 2025, with a local peak to be reached at 5.4% in March 2025. We still assume that interest rates will be cut for the first time 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 of admissible deviations from the MPC inflation target (2.5% +/- 1 pp.). Our interest rate scenario is further underpinned by Poland’s Migration Strategy for 2025-2030 published by the government in October, which indicates that the working age population in Poland is increasingly likely to keep on declining and that the elevated wage pressure is increasingly likely to persist in 2025 as well, and by Donald Trump’s victory in the US presidential election, which is conducive to PLN depreciation (see MACROmap of 04/11/2024). 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 at a substantial, lasting, high-base-effect-driven inflation fall in Q3. NBP Governor’s recent statements were indicative of a growing likelihood of the MPC beginning to cut interest rates in Q2 2025. A. Glapiński’s tomorrow’s press conference will probably tell us more about the outlook for the monetary policy.
In our opinion, the press release following today’s meeting of the Council and the results of the NBP projection will be neutral for the PLN and for the yields on bonds.
