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Poland Watch: The easing cycle starts with a bang
The Polish MPC surprised yesterday with a large 75bp key rate cut to 6% and once again brought lower predictability to the rate outlook in Poland. The PLN weakened in reaction to the cut while more details behind the decision will come from today's conference with NBP Governor.
Surprising first cut may signal an uncertain easing cycle ahead
The launch of the easing cycle in Poland had been implied already by the Governor and MPC members before summer and thus a consensus call for the September meeting was for a 25bp cut. The small scale of the cut assumed by forecasts was in line with indications from the NBP Governor about a gradual start of the cycle. Moreover, the risks to yesterday's meeting seemed to have been skewed toward a no rate cut as the condition outlined by MPC - single-digit CPI - has not realised in August data (CPI was at 10.1% yoy).
The statement to yesterday's meeting underlined that signs of lower-than-expected demand pressure should allow for a faster return of inflation to target. What already supported expectations for a cut was not only a rapid decline in CPI and the downtrend of core inflation but also the weaker-than-expected performance of the Polish economy (-0.6% yoy in Q2). Still, the size of the cut comes as a surprise especially as it stands in contrast with MPC members' comments while inflation remains above 10% - far from the inflation target which it may not reach even in 2024. Moreover, a fast easing cycle could lift CPI even more on top of the upside risks we have already outlined before (expected consumer demand rebound in H2, still high monthly core inflation dynamics and/or upside risks to energy prices).
Furthermore, the surprising decision to cut comes after a just as surprising launch of the tightening cycle in 2021 (against earlier comments from MPC) which again lowers the predictability if not the credibility of the Council.
We will revise our rate outlook after receiving more information from today's conference with the Governor (3pm). Our initial assumption is that after a large initial cut, the MPC may decide to pause, however even with some signals from the NBP the outlook for rates will be highly uncertain as underlined by today's surprise.
Finally, from a regional perspective, the NBP decision underlines that divergence lies ahead as we see risks of a delayed cutting cycle in Czechia while in Romania the central bank may refrain from key rate changes well into 2024.
The PLN reacted to the decision with a significant weakening to above 4.55 vs the euro (from around 4.47) and thus approached our September forecast for a depreciation of the złoty towards 4.60. Still, our assumptions were that the launch of the monetary easing would have only a minor negative effect (i.e. if it came in at 25bp) and we saw more risks related to the upcoming Parliamentary elections in mid-October. Given the latter, it seems probable that yesterday's move/reaction of EURPLN will not reverse fully for now.
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Dorota STRAUCH
Poland Dorota Strauch is leading economic research on Poland from the RBI Branch located in Warsaw. She began working in Polish RBI network bank in 2010. In 2017 she became the Head of Polish Research team. Having a master’s degree in Financial Markets and Banking she deepened her knowledge by becoming the CFA charterholder in 2016. In the following years she has been focusing on improving data analysis skills with the use of Python programming language. Apart from current economic developments in Poland and the CEE region she is particularly interested in the impact of new technologies on the economy, politics and society.
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