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The National Bank of Poland has followed up last month’s surprise 75 basis point cut with a further 25bps today, bringing the policy rate to 5.75% in line with expectations and our pre-release call in what appears a more orthodox policy move.
Admittedly, conviction heading into this release was low given the bombshell nature of the September policy decision and limited communication from NBP officials since. Given this, market attention following the announcement was focused closely on the policy statement issued shortly after. Taken in the context of a more modest rate move, today’s communication appears to be an attempt to assuage market concerns by appearing not dissimilar to other recent policy statements, though it also failed to address last month’s surprise either.
On the whole, the more moderate rate cut and limited tweaks to the policy statement saw markets respond positively, with the zloty posting a small gain against the euro, although it must be noted that this move would have been larger if the NBP provided more clear-cut guidance on future policy.
Inflation continues to fall, faster than expected by both markets and the NBP, according to Governor Glapinski
Heading into today’s announcement, economists had projected a spectrum of outcomes ranging from no change in policy to a second 75bp cut in a row. With inflation having fallen from 10.1% YoY in August to just 8.2% in the preliminary September data, below consensus estimates for a print of 8.5% and NBP Governor Glapinski’s own projection of 8.6%, the progress on disinflation likely confirmed that policymakers could have cut rates once again without being punished by markets. However, the magnitude of the cut was likely limited by the central bank and Finance Ministry’s concerns over the value of the zloty. Given the market reaction to the previous policy decision saw the zloty fall 4% against the euro in the space of a week, and with EURPLN trading above the 4.60 handle heading into the announcement, risks favoured the moderate 25bp of policy easing that the NBP ultimately delivered.
In our view, today’s announcement suggests that more cuts are likely to follow in November and December, where we are pencilling in two further 25 basis point cuts.
While the accompanying statement today contained little guidance of note beyond a continued suggestion that weak activity would support continued decline in the rate of price growth, comments from Deputy Finance minister Sobon shortly after the announcement were a different story. Sobon suggested that inflation would soon dip below 7%, implying to us that more rate cuts are likely. Whether or not this sentiment is shared by Governor Glapinski is crucial, and markets will have to wait until his press conference tomorrow to find out.
Beyond that, FX market focus is likely to turn to the election on October 15th, where polling currently suggests that the ruling Law and Justice party will fail to secure a parliamentary majority.
Author:
Nick Rees, FX Market Analyst