Poland ends tightening cycle, may start cutting rates in September

"In the second half (of the year), our economy should accelerate together with external shocks going away," Glapiński forecast. Tytus Żmijewski/PAP

Poland's Monetary Policy Council (MPC) decided to formally end the tightening cycle, with interest rates cuts possible in September once conditions are met, Adam Glapiński, the governor of the National Bank of Poland (NBP), said on Friday.

Glapiński held a press conference a day after the MPC decided to keep the rates unchanged for the tenth time running, in line with market expectations, following 11 consecutive increases aimed at curbing inflation. Poland's reference interest rate is still at 6.75 percent.

"The cut by 25 basis points (bps) in September is possible once there is a 90-percent certainty that inflation will fall in the coming quarters and years," Glapiński said.

Another condition is a single-digit CPI, with the MPC looking into the matter after the summer holidays, the central bank chief added.

"Inflation has been standing still, with 0-percent growth month on month for two months, May and June," Glapiński said. "In June, the CPI stood at 11.5 percent, which is the lowest level in over a year."

In the fourth quarter, Glapiński expects consumer inflation to go down to 7-8 percent and reach the NBP's target range of 2.5 percent plus/minus one percentage point in the second half of 2025, given nothing unexpected happens such as aggravation of the war in Ukraine.

The NBP head reiterated that he expects a soft landing scenario for Poland's economy in exiting high inflation, with the GDP growth rate nearing 0 percent, but with no recession expected.

"In the second half (of the year), our economy should accelerate together with external shocks going away," Glapiński forecast.

At the same time, he warned industry and trade may experience a hard time as real wages should be growing again in the second half of this year after recent declines of 2-3 percent.

Also costs may be on the rise, he added.

"We assume that there is some safety cushion in businesses that will allow to offset this," Glapiński said, noting that in 2022 50-60 percent of price hikes derived from companies increasing their margins.

According to the recent flash estimate from the stats office GUS, Polish consumer prices likely increased by 11.5 percent year on year on no monthly change in June after a 13.0 percent year-on-year increase in May.

Poland's annual average consumer inflation has a 50-percent chance of falling in the 11.1-12.7 percent range in 2023, then within the 3.7-6.8 percent band in 2024 before touching on the NBP's target of 2.5 percent by falling in the range of 2.1-5.1 percent in 2025, according to the central bank's latest inflation projection cited in the MPC's policy statement.

Poland's latest monetary policy turn contrasts with the still hawkish stance of the US Federal Reserve, whose chair Jerome Powell recently indicated some more rate hikes may be needed to bring inflation to the target of 2 percent, albeit at a slower pace. The latest CPI data for May showed inflation at 4 percent in the US, a reading below the Fed funds rate at roughly 5.1 percent.

The European Central Bank (ECB), which raised interest rates by another 25 bps in June, also seems to be determined to continue with rate hikes, despite a preliminary CPI reading for the eurozone at 5.5 percent in June against the ECB's rate on main refinancing operations now at 4 percent. ECB president, Christine Lagarde, has said Europe's central bank will likely continue rising rates, adding that nothing indicates the peak rate has been reached yet.

Poland's main interest rate at 6.75 percent is still in a deep negative territory considering the preliminary CPI reading for June at 11.5 percent. The Friday decision on ending the rate-hike cycle can be seen as a show of the central bank's confidence in a downward inflation path over the coming months.

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