Interest rates unchanged, MPC strikes a more hawkish tone

MPC strikes a more hawkish tone

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. It is worth noting that the wording of today's press release shifted to a more hawkish tone. Most significantly, a passage was removed which had previously stated 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” and a fragment which had highlighted the anti-inflationary impact of the earlier appreciation of the PLN. Moreover, today’s statement referenced rising inflation in major developed economies, while in the previous ones, the Council emphasized that inflation was moving closer to target levels.The Council maintained its assessment that “in the coming quarters, inflation will remain markedly above the NBP inflation target, driven by the effects of the already introduced increases in energy prices, as well as rises in excise duties and administered services prices”. This assessment was, however, expanded with a new fragment stating that “at the same time, core inflation will probably also continue to be elevated”.

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”. The MPC once again highlighted the uncertainty factors for this scenario – unfreezing of energy prices in H2 2025, the impact of increased inflation on inflation expectations and wage pressures, especially amid the expected economic recovery and low unemployment. The Council also reiterated its view on the future level of interest rates, which “will depend on incoming information regarding prospects for inflation and economic activity”.

Interest rates to remain unchanged in near term

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 revised short-term inflation forecast, which predicts that the growth rate of prices will remain close to 5% YoY until June 2025 (we will present the details of this forecast 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). Tomorrow’s press conference by A. Glapiński will probably offer more clarity about the monetary policy outlook. However, we expect its tone to be fairly hawkish.

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

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