MPC cuts interest rates but expected to be cautious about further moves

The Polish Central Bank’s rate-setting Monetary Policy Council (MPC) announced a cut of 25-bps off the reference interest rate, bringing it to 5.75 percent on Wednesday but it is excepted to be cautious about making further cuts owing to potential risk to the Polish zloty.

The latest moves follows a 75-bps cut in September, and comes amid expectations of a further decline in inflation, including core inflation.

The majority of local analysts see this move as the start "cautious" monetary loosening.

MBank analysts see minor changes in the MPC statement rhetoric suggesting the potential launch of the loosening cycle in Poland, while Pekao economists predict that the council will apply potential further interest cuts in a gradual and selective manner.

"This cycle will involve gradual rate reductions, not at every meeting, while taking into account financial stability risks," Pekao economists said. They see a reference rate at 5.5 percent at the end of the year, and 4 percent at the end of 2024.

ING BSK economists anticipate that remarks from the Central Bank president, which are expected on Thursday, will reflect a more cautious rhetoric towards monetary policy loosening, taking into account a final rate cut at 25 bps despite some recent expectations of a 50-bps move. In their opinion, the MPC' decision may result in a slight strengthening of the zloty, and a slight increase in bond yields.

"However, the reaction of financial markets will depend on tomorrow's conference," ING economists said. They also expect the potential loosening cycle not to be quick and deep.

On the other hand, Millennium economists do not see a clear message at the MPC statement. They expect a "significantly reduced" room for further interest rate cuts this year following recent reductions by 75 and 25 bps, which results from a depreciation threat to the Polish zloty amid hawkish rhetoric from both the Federal Reserve and the ECB.

Experts agree on the need to protect the Polish currency when applying further rate cuts.

"It was recently decided by the Council to slow down the process of easing, which seems like a reasonable decision considering the lesson learned from the market after the previous decision," Mikołaj Raczyński, analyst at Portu investment platform said in a comment, adding that this refers to the rapid weakening of the zloty following the previous 75-bps rate cut.

The MPC itself upheld the assessment that the decrease in inflation would be faster if supported by an appreciation of the zloty exchange rate, which would be consistent with the fundamentals of the Polish economy. Thus, the council has not ruled out interventions on the FX market.