On Tuesday, February 6, the Monetary Policy Council (RPP) is starting a two-day meeting with the decision scheduled to be announced on Wednesday, February 7. A press conference with the participation of President Adam Glapiński will take place the day after the decision, on February 8 at 3:00 PM. All market participants are certain that the RPP will keep interest rates unchanged, hence the focus will primarily be on the press conference featuring the head of the National Bank of Poland (NBP).
What are the chances and indications that interest rates will be lowered in March this year? Will the RPP still postpone and wait for the first cuts by the Federal Reserve (Fed) and the European Central Bank (ECB)? What will the March inflation projections show?
The RPP’s second decision this year should go off without a hitch, with interest rates likely to remain unchanged. This would mean that the main interest rate will stay at 5.75% after a total cut of 100 basis points was made in September and October. Therefore, the market’s attention will shift to Thursday’s press conference. President Glapiński will likely repeat his most recent statements about responding to upcoming data and tracking decisions by the Fed and ECB. However, it’s not excluded that the NBP president will indicate that March could still be in play for interest rate cuts, in case of a positive outlook from the March inflation forecast.
At the same time, it’s important to realize that the inflation trajectory later this year will largely depend on government decisions regarding administered prices. The game primarily involves the VAT rate on food, currently set at 0%, which could return to 5% after the first quarter. Besides, the government may decide to continue freezing energy prices in the second half of the year. Meanwhile, energy prices on the exchanges have generally been falling recently, so any decision to stop freezing prices would have a smaller impact on inflation growth than one might have expected last year.
It’s possible that inflation in February and March will strongly approach the inflation target, but it will probably start to rebound later in the year due to the base effect. Moreover, EBC and Fed cuts are being pushed back, which might also sway the RPP to withhold a decision on lowering interest rates. On another note, some RPP members hint at potential interest rate hikes or selling bonds bought during the pandemic under unconventional measures. Of course, several interest rate cuts are still in the baseline scenario for Poland this year, although further surprises can’t be ruled out.
Currently, maintaining the status quo and a lack of clear signals indicating the need for interest rate cuts mean that the Polish zloty is holding up quite well. The market still sees a chance for three interest rate cuts this year, but a lack of a reduction in March might lower these expectations. It’s worth noting that the Czech National Bank is also making a decision this Thursday, and another cut of 25 basis points to 6.5% is expected in this case. CPI inflation in the Czech Republic is higher than in Poland, at 6.9% in December. However, it should be emphasized that the CNB only started lowering rates in December when real interest rates reached a positive level.
Author: Michał Stajniak, Deputy Director of XTB Analysis Department.
