Another meeting of the Monetary Policy Council (MPC) is ahead of us. This coming Wednesday, we will get to know the decision regarding interest rates. The market is eagerly awaiting this decision, especially after the big surprise in September. At that time, the MPC decided to make quite a strong cut in the price of money. The market consensus then was indecisive between leaving the rates at the current level or cutting them by 25 basis points. They were eventually lowered by as much as 75 basis points. What will happen this time? Commentary from the Chief Analyst of Tavex – Tomasz Gessner.
Inflation Surprises?
In previous months, the National Bank of Poland (NBP) signalled that a rate cut would most likely occur when the CPI inflation drops to single-digit values. Although the reading for August showed 10.1%, a cut happened, which was related to the MPC’s access to short-term data, which at the time of making the decision already indicated a drop in the annual dynamics of CPI below 10%.
Last Friday, we got preliminary data on CPI inflation for September. It was expected that it would drop to 8.5%, but it was actually 8.2%. Month-to-month, we also recorded 0.4% deflation. Undoubtedly, low fuel prices at petrol stations help to dampen the inflation indicator, persisting against global trends seen in the oil market, further reinforced by the strengthening dollar. The price of a barrel of oil expressed in zloty has risen by more than 50% from the June low.
Moreover, in the context of the impact on inflation, it is also worth mentioning the still assisting base effect. The positive impact of this effect, however, is ending this month. It was in October 2022 when the annual dynamics of CPI inflation reached its then peak of 17.9%. This was once beaten 4 months later, but apart from the February reading, it can be seen that since last autumn inflation has been falling in Poland.
Green Light for Another Rate Cut
Referring to the latest inflation reading, there’s nothing stopping the Monetary Policy Council from following the September cut and once again deciding to cut interest rates. Looking at the market consensus, it assumes a rate cut of 25 basis points this coming Wednesday. The question remains whether the MPC will again surprise the market by making an even more aggressive change in the price of money. If this happens, it could be another hit for the condition of the national currency, just as it happened after the September MPC meeting.
However, it is worth remembering that when prices at petrol stations begin to normalize, and additionally, the increasingly higher reference points from last year’s inflation stop helping, the current dynamics of declining inflation may start to slow down more significantly, which will make it more difficult to bring inflation to the National Bank of Poland’s target. Moreover, the zloty, weakening in such conditions, will start to import inflation. Theoretically, the NBP’s foreign exchange reserves, which could be used for intervention in the foreign exchange market, protect us from excessive depreciation of the national currency. However, the thing with interventions is that they work in the short term, but they cannot change the main trend. And this trend has been negative for the zloty for the past 15 years.
