Inflation in Poland is decelerating quickly, but the pace of annual growth has halted slightly above 6 percent. Considering the base effect, i.e., high indices from a year ago, the increase in prices is still too fast relative to the inflation target. The planned abolition of anti-inflation shields, scheduled to occur at the end of Q1 and Q2 of this year, remains a problem. The Monetary Policy Council is unlikely to change interest rates this year, despite its wavering narrative. It is apparent that inflation is the biggest issue in our region.
“Inflation will be at the forefront of attention this year mainly because there could be significant volatility around March and April,” Mikołaj Raczyński, Managing Director at Port in Poland, tells Newseria Biznes. “It has a chance to drop to levels near the inflation target, but that is likely to be a very temporary decline, and it will start to grow again. The direction, whether 5, 6, 7, or 8 percent, will depend on the economic climate and inflationary pressure in the entire economy, as well as issues related to anti-inflation shields.”
Inflation in Poland peaked in February 2023, at 18.4 percent year on year. This was the fastest pace in over a quarter-century. In the following months, it decelerated quickly, dropping to 6.2 percent in December. However, this is still significantly above the inflation target of 2.5 percent, with an allowable fluctuation band of +/- 1 percentage point.
According to Raczyński, an element that could disrupt the inflation trajectory this year is the planned removal of anti-inflation shields, i.e., zero VAT on food from the end of March. Meanwhile, the prices of electricity, gas, and heating for households and local governments are to be frozen until mid-2024.
“When the shields expire, the inflation indices will mechanically spike. But I would argue about how anti-inflationary the shields are. One year, certain prices are reduced, but in the perspective of several years, the impact on inflation is negligible, and the shields will need to be restored eventually. From a multi-year, multi-quarter perspective, also from the perspective of the National Bank of Poland, we should look not at the shields, but at where inflationary pressure in the entire economy is heading,” Raczyński points out.
The next steps of the Monetary Policy Council will also depend on this. Between October 2021 and September 2022, interest rates rose from close to zero (0.10 percent reference rate) to 6.75 percent.
Raczyński emphasizes that the Monetary Policy Council could take multiple actions, but it has recently been sending mixed messages. “Just before the elections last year, the Council was lowering interest rates, saying that the inflation problem was practically resolved. Suddenly, after the parliamentary elections, it stated that was not the case, and even began to suggest that there might be increases in interest rates. It seems that maintaining the interest rates at the current level in the coming quarters is the most likely scenario, but none can be ruled out today.”
High inflation continues to be a problem in the entire Central and Eastern Europe region. Data from Eurostat indicates that Poland had an inflation rate of 6.2 percent in December, only outstripped by the Czech Republic, Romania, and Slovakia—the only country in this group that has adopted the euro.
“Inflation continues to be the biggest challenge, in Europe, in our region, and in countries that have also manipulated their inflation indices a lot, such as Hungary and Poland, but also Central and Eastern European countries. Inflation remains high in Slovakia,” says Raczyński. “This is also due to the lower culture of inflation than in euro area countries, faster economic growth. Food prices are normalizing now, but previous increases had a larger impact on how strongly inflation was rising, and this also translated into household inflation expectations, so our region continues to be the region with the highest inflation.”
