Compared to August, prices fell by 0.4%. A large contribution to the decline in the CPI came from food prices, which fell for the fourth consecutive month on a month-on-month basis (0.4%). Energy prices also decreased (-0.7% month-on-month), helped by the increase in the energy consumption limit at which the price is frozen at the 2022 level. September also brought a sharp drop in gasoline prices and diesel (-3.1% Mom).
The drop in core inflation (excluding food and energy prices) was also substantial: from 10% year-on-year in August to 8.5% year-on-year in September. On a monthly basis, prices remained stable.
The fall in inflation is a positive sign and will support a recovery in consumption. Downward pressure on food prices continues. Part of the disinflation, especially with respect to energy and domestic fuels, was due to regulatory measures and intervention by the government and public entities.
The most dynamic period of disinflation is now behind us. By the end of 2023, we expect inflation to fall to around 7% year-on-year, and from mid-2024 onwards, it will stabilize around 5-6% year-on-year, remaining clearly above the NBP target. Furthermore, falling interest rates, rising oil prices and the weakening zloty are setting the stage for a weaker period of disinflation in 2025.
We expect the MPC to cut interest rates by 25 basis points to 5.75% next week in response to disinflation. At the end of 2023, the reference rate should fall to 5.50%. With the CPI stabilizing around 5-6%, the scope for further rate cuts in 2024 is limited.
We are concerned that the market can resist the NBP’s excessive disinflationary optimism with a weaker zloty, as the disinflation process in Poland seems unsustainable compared to other countries:
- The fall in core inflation continues to be much slower than in the rest of the region and the combination of domestic policies is hardly helping to reduce it.
- In the Czech Republic, the inflation target should be reached in the first quarter, while in Poland, the BNP forecasts a CPI of around 3.5% in the second half of 2025 and, in our opinion, this will happen much later .
- The NBP has adjusted its ultra-loose stance, but still steers clear of cautious Hungary (aiming for positive real rates) and the Czech Republic (delaying a first rate cut despite better inflation prospects).
- The NBP wants to cut rates even though the Federal Reserve and the European Central Bank have finally convinced markets that high rates will stay in place for longer.
We believe that the NBP president’s rhetoric next week will be very important for the zloty. Placing too much emphasis on single-digit inflation could raise concerns that the NBP will again adopt a very loose stance, misaligned with the inflation outlook and the region’s central banks, as well as the Federal Reserve and the ECB. This may result in new pressure on the zloty.