Inflation outlook in Poland should improve, leading to rate cuts

This month’s Monetary Policy Council statement is more concise than after the June meeting, but it speaks of a greater conviction about the decline in inflation in the second half of 2023 and 2024. Also, the MPC expresses its view that rate hikes are working and inflation is coming down to the target. National Bank of Poland President Glapiński is likely to speak in this vein tomorrow!

The most important changes in the communication are:

(1) a more optimistic picture of global inflation

(2) more optimistic inflation trends in Poland - e.g. the sentences mentioning the still ongoing process of passing on high costs to prices have disappeared

(3) a greater belief in the effectiveness of the monetary tightening, which has already started the process of bringing inflation down to the target: in the summary passage on future inflation, the MPC states that: "The Council assesses that the strong tightening of the NBP monetary policy is leading to a decline in inflation in Poland towards the NBP inflation target". Earlier, it had said that the strong tightening of the NBP's monetary policy made earlier would lead to a lowering of inflation.

The statement also noted the low economic activity in the second quarter and elevated uncertainty in the global economy and the euro area. The decline in global inflation was highlighted, including a marked decline in producer price dynamics. Although still elevated CPI and core inflation was noted, there was mention that the latter is gradually declining.

Regarding the domestic situation, the Council points out that the annual CPI fell once again to 11.5% year-on-year in June from 13.0% in May, while remaining unchanged for the second consecutive month in month-on-month terms. The Council estimates that core inflation also declined in June and notes a strong fall in PPI producer inflation, which will influence the CPI to fall further in future quarters.

In our view, the projections show a better inflation picture in the second half of the year and 2024, but the longer-term outlook is less optimistic:

(1) the NBP’s CPI projection for 2023 remained unchanged, but for 2024 was revised down by 0.5 percentage points compared to the March publication, a short-term faster decline in inflation is emerging from these numbers, but the CPI projection for 2025, which has increased slightly, is of concern (see also below)

(2) in our view, with average CPI projection for 2023 at 11.9% YoY, we still think that a decrease of headline CPI below 10% in August is still possible, which could lead to an interest rate cut after the summer.

In contrast, annual GDP growth is expected to be -0.2 - 1.3% YoY this year (-0.1 - 1.8% assumed in March), 1.4 - 3.3% in 2024 (previously 1.1 - 3.1%) and 2.1 - 4.4% in 2025 (vs. 2.0 - 4.3%).

The MPC is strongly focused on the second half of 2023 and 2024 – a period when the inflation situation looks better compared with the March projection, so we maintain our view that rate cuts are possible after the holidays, i.e. in September and October. Tomorrow, during its press conference the NBP President should sound dovish, highlighting many of the above-mentioned developments towards lower inflation and preparing the ground for rate cuts.

In the longer term, we do not see a convincing weakening of inflationary pressures. With the CPI projection for 2024 at 5.3% YoY and a planned minimum wage increase of around 20%, the real minimum wage in 2024 will increase by more than 15%! We maintain our view that going down to the NBP's 2.5% target with such real wages will be difficult and long-lasting. Our models show core inflation stabilising at 5% YoY in 2024-25.

At tomorrow's press conference by NBP Governor Adam Glapiński, we expect the tone to be more dovish than a month ago. It is possible that the governor will prepare the ground for interest rate cuts after the summer.