Inflation at the beginning of the year will be lower, but it is expected to bounce back in the following months. There is a chance for three interest rate cuts this year. However, it is also possible that there will not be any.
As expected, the Monetary Policy Council (RPP) decided not to change the interest rates during its first meeting this year. This means that the main rate remains at 5.75%. Inflation continues to fall, and for the last month of 2023, it reached 6.2% (slightly above the preliminary reading of 6.1%), which is the lowest pace since the autumn of 2021. Prices are still rising but at a slower rate.
According to the National Bank of Poland (NBP) November inflation forecast, the average inflation rate is expected to be 4.6% this year, which would imply that at some point the real interest rate would become positive if there were no changes later in the year.
The November report indicates a moderate decline in inflation this year and reaching the inflation target range by the end of 2025. If the March report maintains the current trajectory of price dynamics or even shows a faster return to the target, then interest rate cuts should occur later this year.
However, the NBP’s March report may go in a different direction with the central bank paying more attention to the fiscal policy of the new government. If they consider it to be excessively inflationary, we cannot rule out the maintenance of interest rates for an extended period.
“During the March meeting of the RPP, its members will already know the new NBP inflation projections, so it is not expected for any change in interest rates until March, unless there are particularly significant, new data on the Polish economy, which is currently quite optimistic,” says Michał Stajniak, an expert at XTB, in an interview with MarketNews24.
Around March-April, inflation may decrease to a level that falls within the NBP’s official target (2.5% +/- 1%). This scenario is becoming increasingly popular among economists, but it does not imply reasons for increased optimism. At the same time, a prominent rebound in inflation after noting a spring low is becoming a more common scenario.
“Inflation will start rebounding because the base effect will not be as strong as in the first months of this year,” comments the XTB expert. “It will be important to see whether increased government spending will be directed towards consumption or investment.”
If inflation averages 4.6% this year and 3.7% in 2025, the rate cuts will not be very large. Will Poland cut rates this year by 75-100 basis points if the US initiates rate cuts first? Early rate cuts in Poland could lead to unfavorable outflows of foreign investors’ funds.
Will the RPP cut interest rates by 25bp in March and July? Is this the most popular scenario since the potential for larger-scale reductions is limited due to our expected inflation increase in the second half?
“If there are to be interest rate cuts, I believe they are possible towards the end of the second quarter or in the second half of this year,” concludes M.Stajniak from XTB. “I think there will be three cuts of 25 basis points, so the main interest rate will reach 5%, so interest rates close to zero will not return for a very long time.”
