National Bank of Poland preview: time to react to slowing inflation

Following a decline to 2.8% year-on-year in August, headline inflation is now close to the National Bank of Poland (NBP) target and safely within the range acceptable of deviations from the target (2.5%; ±1 percentage point). The drop in CPI inflation over the summer months and the continued downward trend in core inflation are good news for the MPC. Given the decline in inflation toward the target and the relatively high nominal reference rate (5.00%), we expect a decision to ease monetary policy by 25 basis points on Wednesday.

Statements from NBP officials indicate that inflation prospects, and hence the outlook on monetary policy, depend on the state of the business cycle, labour market conditions, energy prices, and fiscal developments. Most of these areas are developing favourably.

Economic growth is solid, but the economy is not overheating and generating additional inflationary pressure. Wage growth slowed to 7.6%YoY in July. Signals from the government and the president suggest a willingness to extend the freeze on household electricity prices into 4Q25.

The only exception to generally easing inflationary risks is fiscal policy, being more expansionary than previously announced (the general government sector deficit is currently estimated at 6.9% of GDP versus the 6.3% of GDP previously expected), and the 2026 budget does not indicate significant tightening (deficit projected at 6.5% of GDP).

We expect NBP Governor Adam Glapinski to highlight this factor during Thursday's press conference. He may signal a more cautious approach to further monetary easing in the coming months. In this context, October may bring a pause in rate cuts, with the next debate likely in November, when the Council reviews the new inflation projection.

According to our forecasts, inflation will remain close to the NBP target in the coming quarters, giving the MPC room to continue monetary policy easing into 2026.

We still forecast a 3.5% NBP terminal rate for 2026, but the upside risks are growing. The Ministry of Finance’s projection of a higher general government deficit in 2025, slower fiscal consolidation in the mid-term, and the MPC’s still cautious stance – despite signs of easing inflation and cooling wage pressure – could challenge the baseline.

Still, given our CPI forecasts and expected developments of the nominal NBP rate, the next year's real rate (ex ante) should drop to around 1.5%, i.e. the level last seen at the beginning of 2024 and much above the historical average.