Investors feared a significant interest rate cut, however, a repeat of the situation from a month ago did not happen, and the decision was in line with market consensus. Meanwhile, our path to low inflation is becoming longer.
The Monetary Policy Council (MPC) decided to lower the interest rates by 25 basis points, this time, aligning with analysts’ expectations even though it should be admitted that there was a very wide range of predictions this time. The MPC decision strengthened the Polish zloty as the worst-case scenario did not materialize.
The MPC did exactly what the market expected. Lowering the interest rate to 5.75%, which seemed fairly obvious considering the rather sharp decline in inflation for September, brought up doubts as to how such an achievement was made to the CPI.
“From the investors’ point of view, such a reduction was the best possible scenario that the Monetary Policy Council could serve the market this time, and we no longer see the crazy selloff of the Polish zloty that took place after the September decision to cut by 75 basis points,” says Michał Stajniak, XTB expert, in an interview with MarketNews24.
Inflation for September fell to 8.2% YoY, while it was a monthly decrease of 0.4% MoM, one of the biggest in recent years. Hence, it seemed reasonable that the MPC would opt for another reduction, albeit smaller, to avoid further damaging the Polish zloty.
This essentially happened as the USDPLN pair, after testing the 4.45 level, found itself at 4.37 shortly after the decision. There was a certain weakness of the dollar to it, but undoubtedly, investors in Poland heaved a sigh of relief that we did not have such a big surprise as a month ago.
It is still essential to see how low interest rates can be lowered by the end of this year and the entire cycle. The market, before the October MPC decision, priced in the possibility of a lowering of rates to even 5.25% this year, while in 12 months’ perspective, rates could fall even to 4%. It is no longer excluded if inflation keeps falling and the MPC would like to keep negative real interest rates.
“If there is a decrease to 5.25% this year, then at the end of the year, we will have lower interest rates in Poland than those in the USA, even though inflation is much smaller in the USA,” comments XTB expert.
By mid-next year, inflation is expected to be around 5% looking at the latest inflation projections, and we will learn about the latest forecasts from the National Bank of Poland (NBP) in November. These new projections should mostly answer how deeply the rates could fall. It is important to emphasize that the NBP forecasts, drawn up at a constant interest rate until the end of the forecast horizon, ie until 2025.
In the new November forecasts, we should find out what expectations for 2026 are. Most likely, the achievement of the inflation target may be postponed to 2026.
“The NBP report will probably contain an updated interest rates path, especially as these forecasts will be made at a rate 100 points lower than before, and we will see how quickly inflation should be falling this year and in twelve months, at already lower interest rates,” explains M.Stajniak from XTB. “I think we will also learn that the inflation target will be reached later, perhaps in 2026.”
The journey to the inflation target, that is inflation 2.5% – considered healthy for the Polish economy, will be extended. It’s no longer 2025. The base effect should positively affect monthly data on price growth. Inflation should be falling over the next 6-9 months, largely due to the base effect, calculated year-on-year.
“Inflation has already fallen to 8.2%, first and foremost due to the base effect, and to a lesser extent – due to energy and fuel prices,” says the expert.
“The base effect will stop positively affecting next year, but by that time, inflation should fall to 5-6%,” the expert adds.
