The Monetary Policy Council’s decision to maintain interest rates (the policy rate at 5.75%) is no surprise. We look forward to tomorrow’s conference by PNB President Adam Glapiński. On the one hand, recent communications point to the end of the easing cycle, but on the other, the main central banks are about to begin monetary easing (Fed, ECB, CNB). Furthermore, the external inflation outlook is improving considerably and the consensus is shifting towards an earlier return of the CPI to its target in the euro area and the United States or even earlier cuts by the Federal Reserve and the Central Bank European.
Minor modification to the post-meeting press release.
In the official written statement, the Council assessed that the recent appreciation favors the reduction of inflation and is consistent with economic fundamentals. For many months, the MPC had expressed its desire for such a change to occur in the PLN exchange rate. This suggests that, in the NBP’s view, further appreciation of the zloty is no longer welcome and would not be beneficial for the Polish economy. The authorities also noted a further decline in core inflation in November and a deflation of the PPI, which the Council believes confirms the fading of most external supply shocks. The MPC also mentioned a gradual economic recovery.
Communication and decisions of the MPC in the coming months
We wonder where MPC communication will go in the coming months. There is great uncertainty about whether it will be even more aggressive or, following other banks, neutral or perhaps dovish. Factors that will shape policy decisions in the coming months mentioned in the press release include the scale of fiscal expansion, the scale and timing of regulated price adjustments, and their impact on inflation. Authorities repeated that future decisions will depend on incoming macroeconomic data.
Rates to remain unchanged in 2024, but new risk factors emerged
In our opinion, the MPC is likely to refrain from changing the main parameters of monetary policy in 2024, pending important administrative decisions for the inflation profile (regulated energy prices, protective measures, VAT on food ) and information on the scale of fiscal expansion in 2024. The MPC is likely to make its first serious consideration of the rate level in March on the occasion of the next inflation projection, which should take into account the aforementioned factors.
If our inflation scenario materializes (that is, in the short term, inflation may surprise to the downside, especially the core inflation rate, but in the long term it will remain above target), there will be no room for inflation cuts. the BNP rate at least until the end of 2024.
In our opinion, the picture of Polish inflation prospects may change if the PLN strengthens further. We see risks of a stronger zloty and an earlier return of the CPI to target, suggesting earlier cuts than we currently assume. At the same time, large inflows of EU funds, foreign direct investment and fiscal expansion are arguments against rate cuts as they can boost economic activity; The balance of risks points to an earlier cut than we assume.