Our take on the decision
The National Bank of Poland has not formally closed the tightening cycle, but effectively this already happened a month ago when the MPC also decided to leave rates flat despite new higher CPI projection showing:
(1) higher inflation in 2023 by 0.8 percentage points, at 13.1% year-on-year on average;
(2) unfavourable CPI structure – the NBP shared our concerns about stubbornly high core inflation and raised its 2023 forecast by as much as one-third;
(3) additionally, the November projection showed a return of CPI to the target range (2.5%, +/-1%), only in the second half of 2025, and this under rather optimistic assumptions about commodity markets and a rapid expiration of second-round effects and a marked deterioration in Poland’s labour market.
The decision to hold rates flat is no surprise. The MPC sticks to its de facto target, which the Council has defined as: (1) slow disinflation and (2) allowing a mild deceleration of GDP. The de jure target assuming inflation at 2.5% +/-1% is of less importance now. That is why the MPC decided to leave rates unchanged, despite the many risks of long-term high inflation.
Outside the Polish economy, there are ‘green shoots’ showing a softening of global inflation pressure, i.e. a big improvement in supply chains, and a drop in energy commodity prices. Also, inflation has passed its peak in countries unaffected by the gas shock, such as the US, but not Europe. As 2021-22 saw the biggest price shock since the 1970s and many investors stayed short duration, now we see a massive unwind of these positions taking place. This has resulted in a strengthening of Polish debt and and in our view masks a short-sighted monetary policy.
