Lower inflation reading provides rationale for rate cuts say economists
A stronger than expected decline in inflation, including core inflation, supports the likely scenario that the Monetary Policy Council (MPC) during its meeting in October will cut interest rates, say economists.
Prices of consumer goods and services (Consumer Price Index, CPI) increased by 8.2 percent year on year and fell by 0.4 percent month on month in September 2023, the Central Statistical Office (GUS) reported in a flash estimate on Friday. This was a slower pace of inflation compared to August, when the CPI reached 10.1 percent year on year.
Grzegorz Maliszewski, an economist at Bank Millennium said there would be strong arguments for an easing of monetary policy in light of the strong decline of inflation in September, including core inflation, and since it was likely that inflation would fall below the level of 7 percent in October. "This increases expectations for a rate cut in October, although on a smaller scale than in September – by 50 basis points," he said.
The MPC will make its next policy decision on Wednesday, October 4.
"We have a positive surprise," Maliszewski added. "Regulatory factors were undoubtedly elements that supported the decline in inflation, in view of the fact that we had the introduction in September of the programme that provided free medicines for children and seniors.
"We can also see the strong impact that the drop in fuel prices had - over 3 percent in September alone - contrary to trends in international markets," he added.
Further declines in the CPI would be seen in the coming months, certainly in October, as fuel price declines would continue, Maliszewski commented. "Therefore, the last months of this year will see a continuation of a decline in inflation."
In the opinion of Monika Kurtek, an analyst at Bank Pocztowy, the main factor behind such a significant decline in the CPI index in September was the price of fuel. This was primarily due to the "extraordinary drop" in fuel prices in Poland while world crude oil prices during this period were rising sharply and the Polish zloty was significantly weaker. "This helped to bring down the inflation rate to close to 8.0 percent year on year," she said.
"Today's CPI reading, below not only the average market expectations, but also lower than the NBP (central bank - PAP) president's (Adam Glapinski - PAP) indications from the beginning of this month (around 8.6 percent year on year), will most likely encourage the majority in the Monetary Policy Council to reduce interest rates again next week" she said, adding that "we should expect, in my opinion, a rate cut of 25-50 basis points."
Sebastian Sajnog, an analyst with the Polish Economic Institute, a government-sponsored economic think tank, reiterated the view that fuel prices had a significant impact on the CPI.
"This is mainly the result of a further slowdown in the growth of fuel and food prices," Sajnog said. "In the coming months, inflation will continue to fall moderately as the pace will be much slower than recently."
The September CPI drop was lower than expected, as economists polled by PAP Business estimated that September's CPI would reach 8.5 percent year on year and drop by 0.1 percent month on month.