This time, as expected, the Monetary Policy Council has kept interest rates unchanged. In November, we had a surprise, as it was expected that the interest rate cuts would continue until the end of this year. However, it seems that some uncertainty has emerged amongst the Council regarding the further decline in the price dynamics, even though the latest inflation forecasts did not change the target achievement date.
The main interest rate remains unchanged at 5.75%. This means that there have been “only” two interest rate cuts this year, first by 75 bp, which wreaked havoc on the Polish zloty, and then by 25 basis points. Since November, interest rates have remained unchanged, meaning that borrowers will not “receive” any relief in the form of lower interest in the near future. Furthermore, we should not expect that interest rates will change in the next 3 months, according to the market. Also, some members of the MPC indicated that further considerations regarding the possibility of resuming interest rate cuts should only be undertaken in March, when we will get another inflation report. November’s inflation projections showed that with a 50%probability, inflation will fall to the target range by the end of 2025. This seems a distant date, especially since inflation fell this year from 18.4% in February to 6.5% in November. However, it is worth remembering that the effect of a very high base will soon end and it will be difficult to observe such dynamic falls in inflation. Currently, low crude oil prices should cause fuel prices to drop slightly, although on the other hand, losses generated in the early autumn, when fuel prices at some point fell below PLN 6 per liter, can now be made up for, given the current rises in the oil market. At the moment, the market doubts the success of OPEC+’s further oil production cuts, which is causing a clear fall in prices.
Returning to the MPC’s decision and prospects regarding rates and the Polish zloty, it is worth looking at what the most important central banks in the world will do. There are fears that the European Central Bank will be forced to cut interest rates faster than the Fed, which will most likely start reducing interest rates only in the middle of next year. In such a case, it seems that the resumption of interest rate cuts, although most likely within the 5% range, should occur no sooner than in the second quarter of next year.
The recent lack of cuts from the MPC has clearly benefited the Polish zloty. The zloty was one of the strongest currencies in November and remains among the strongest currencies against the dollar since the start of this year. Although the post-election effect may be fading slightly, the prospect of faster cuts in the Fed could allow the zloty to dip below PLN 4 per one dollar again. However, long-term forecasts indicate that the zloty will most likely not be as strong as in 2023.
Author: Michał Stajniak, Deputy Director of XTB Analysis Department.
