Today, the European Central Bank did not lower interest rates. Similarly, the Federal Reserve (FED) is expected to keep rates unchanged next week. Poland’s Monetary Policy Council (RPP) will also not cut rates in the upcoming months. The timing of the first rate cuts has been pushed back towards the second half of the year. However, the prospect of rate cuts alone is already having a positive impact on financial markets.
Today, the ECB has left interest rates unchanged. The same is anticipated from the FED next week, as part of its January 31st decision. Likewise, Poland’s Monetary Policy Council is unlikely to revise interest rates on February 7th. The timing of the first rate cuts in the USA and Europe is drawing closer, although they will come later than we expected a few months ago.
An important factor influencing expectations concerning rate cuts is the significant drop in inflation. In the eurozone, inflation in December stood at 2.9%, down from its peak of 10.6% in October 2022. This drop is primarily due to declining energy prices, although food prices continue to rise. The latest ECB forecasts predict inflation at 2.7% in 2024, 2.1% in 2025, and 1.9% in 2026. Another element is the outlook for economic growth, or rather its lack. The eurozone is currently grappling with stagnation, and some countries are even facing recession. A monetary policy easing could help to improve the economic situation.
The market expects that interest rates in the eurozone will drop at the earliest in April and will decrease by 1.25 percentage points (from the current level of 4.5%) by the end of the year. However, ECB representatives, including Christine Lagarde, stress that all decisions will be based on an assessment of the current economic data, which is interpreted as a postponement of rate cuts. This is due to concerns about a return to higher inflation driven by wage increase pressures. Forecasts indicate a wage rise in the eurozone of 4.6% this year, above the 3% considered safe to keep inflation near the target. The ECB may delay rate cuts until it receives wage data for the first quarter. This data will be published in May, which could mean that the first rate cut may not happen until June.
We are also waiting for the commencement of rate cuts in the USA. The market predicts that under the most likely scenario, the first rate cut in the USA will happen in May and by the end of the year, rates will drop by 1.25 percentage points. The level of inflation and a strong labor market are also significant here. The US economy is performing much better than Europe’s, which could be an argument for delaying rate increases.
In Poland, the NBP’s reference rate currently stands at 5.75%. The Monetary Policy Council cut rates twice in September and October, by a total of 1 percentage point. We expect further interest rate cuts this year, but they will not start until at least the second quarter. Poland is still struggling with high inflation, which stood at 6.2% in December (averaging 11.4% in 2023).
Inflation is steadily decreasing, but a sudden increase could occur if the government decided to roll back the VAT reduction on food or freeze the prices of electricity for consumers. According to the latest S&P Global Ratings forecast, inflation in Poland will average 6% in 2024 and 4.1% in 2025. Only in 2026 will inflation average 3.4%, indicating that it may approach the NBP’s inflation target of 2.5% with a 1 percentage point deviation. These levels are higher than those projected in the central path of the NBP’s November projection. This may encourage the RPP, like in the USA and the eurozone, to also delay decisions about further rate cuts.
Paweł Majtkowski, eToro analyst in Poland.
