Today, we will learn about another decision by the Monetary Policy Council regarding interest rates. Market consensus assumes that the rates will remain unchanged at 5.75%, where they settled after last year’s reductions of 75 basis points in September and 25 basis points in October. Tomasz Gessner, the chief analyst at Tavex, emphasizes that there are many indications that the Monetary Policy Council will not soon find reasons for another rate cut. Moreover, he explains the source of the significant loss of the National Bank of Poland and how it relates to interest rates.
What’s next for inflation?
The forecasts presented by the National Bank of Poland in March indicate that inflation will still be above the target in two years. This may mean that there will be no rate cuts this year and possibly next year.
In some ways, this might seem counterintuitive given the recent changes in inflation, which has clearly decreased over the year. Last February, it was at 18.4%, but by March this year, it had dropped to 2%, returning to the permissible deviation band from the NBP’s inflation target of 2.5% +/- 1 percentage point. However, it is essential to remember that the rise in inflation last year generated a growing base effect, which has helped the price growth dynamics to decrease markedly over the last 12 months. Now, this base effect will no longer help.
The latest preliminary CPI inflation reading for April has already broken the previous downward trend, rebounding from 2% in March to 2.4% in April. Additionally, representatives of the Monetary Policy Council often highlight the uncertainty associated with the future of the anti-inflation shield. This shield on food was removed at the end of March, reverting to a 5% VAT rate, significantly impacting the CPI reading for April. The issue of food price changes must also be supplemented by the April frosts, which may reduce some of the crops. There is also the issue of rising energy prices in the second half of the year, as the current reduced prices are set to last until the end of June.
20.8 billion PLN loss of NBP
It is also worth mentioning the financial report recently submitted by the National Bank of Poland for last year. It shows that the institution recorded a net loss of 20.8 billion PLN. The main cause was the appreciation of the Polish zloty against foreign currencies, which adversely affects the valuation of NBP’s foreign currency reserves. The financial loss for the fiscal year is subsequently accumulated in the Loss from Previous Years position. From 2016-2023, the total profit achieved by NBP was 37.3 billion PLN, and the total amount of payments to the state budget from these profits amounted to 35.5 billion PLN.
In this context, it is essential to remember that unlike commercial banks, the goal of the National Bank of Poland is not to generate profit but to maintain a stable level of prices and the value of the Polish zloty, thus preventing excessive currency fluctuations. In addition to changes in interest rates implemented by the Monetary Policy Council, NBP has foreign currency reserves that it can use to prevent, for example, excessive weakening of the zloty. If it significantly disposed of these reserves trying to generate profit from currency changes, it would also expose itself to the risk of a potential speculative attack on the national currency.
