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The National Bank of Poland held rates at 5.75% today, in line with our pre-announcement call and consensus expectations. Admittedly, the decision to leave rates unchanged once again was hardly a surprise, with policymakers having consistently guided that any change in rates would come in March at the earliest, when a new set of inflation forecasts are published. That said, there had been hopes that a hint on the direction of travel might be offered in today’s policy statement.
This appears to have been delivered, and if anything, was a little more hawkish than we had envisaged. The statement suggested that while inflation would slow sharply in the coming months, there is a risk that price pressures increase significantly in the second half of the year, suggestive that the Monetary Council would like to keep all options open heading into the March meeting. Even so, we suspect that a downgrade in the bank’s inflation forecasts will ultimately prompt a modest rate cut next month, despite today’s hawkishness. For now, though, markets appear to be taking the Bank’s hawkishness at face value, with the zloty outperforming CE3 peers to chart modest gains on the euro following today’s announcement. With the policy statement released, attention will now turn to Governor Glapinski’s press conference tomorrow and whether the semblance of hawkishness is repeated. This latest decision to leave the base rate unchanged was hardly a surprise for markets. Of the 35 economists surveyed by Bloomberg, all expected no change in policy.
Today’s decision means the NBP has now kept policy on hold at every meeting since November, justified on the basis that the inflation outlook has become significantly more uncertain following an October 15th General election and subsequent change in government.
Today’s policy statement largely reiterated these risks, noting that uncertainty around the rate path remains, but highlighted the role of fiscal and regulatory developments in particular. These, in our view, are likely tilted to the upside, at least as viewed by the NBP. Notably, the new government has announced more generous fiscal plans than initially proposed by their predecessors. And whilst the disbursement of EU funds would be a welcome boost for the flagging economy, it is also true that large fiscal injections risk stoking inflation pressures. However, none of this should detract from the most recent December inflation figures, which undershot expectations by coming in at 6.2% YoY with markets initially anticipating a 6.5% reading.
Granted, recent rounds of inflation data have shown Polish disinflation appearing to stall after rapid progress earlier in 2023, but we still suspect that inflation is tracking below where policymakers expected it would be when initially calling a halt to policy easing back in November.
The outcome of the March meeting now hangs on a new set of inflation forecasts, set to be published by NBP staff next month alongside the next rate decision. By this point, staff will have only have access to the January inflation data, which we expect to show further disinflation in the headline pace seeing as last year’s 2.5% MoM contribution drops out of the calculation, but the economists can also take confidence of similar base effects for both February and March, where inflation last year jointly recorded 2.3% MoM.
All told, that means if price growth continues to track in line with the 2023 average from April to December, this would leave the annual inflation rate hovering just above the Bank’s tolerance band in the upcoming round of figures, set to published on February 15th, before sinking below the NBP’s target over the following two months.
Admittedly, we still think that January price re-setting will see inflation tracking above this trajectory, although we don’t think it will be by a significant margin. This point was also seemingly recognised in today’s communications, with the policy statement noting that inflation should fall significantly in Q1. But by accompanying this with a suggestion that inflation pressures might increase significantly in the second half of 2024, policymakers appear to be trying to keep all options for March open in our view.
Despite this, if the sharp step down in near-term price growth we expect to see is reflected in the NBP’s March forecasts, it will likely be difficult for policymakers to justify continued hold in rates.As such, we anticipate a resumption of rate cuts in March, likely by 25bps, but with no strong view on the subsequent pace of easing at this juncture, especially given today’s hawkish pushback.
Author:
Nick Rees, FX Market Analyst