What will the Monetary Policy Council do? Will we have another surprising decision?

First, let us remind you that a month ago there was a surprising market reduction in interest rates by the Monetary Policy Council by 75 basis points and the reference rate dropped from 6,75 to 6,00%. As stated in the statement accompanying the decision, the Monetary Policy Council explained it as follows:

The situation in the world economy

The Monetary Policy Council emphasized that the condition of the global economy is currently weakened. There are also large uncertainties regarding the prospects for activity in the largest economies, including the euro area, where annual GDP growth is slowing. In particular, Germany recorded negative GDP dynamics in the second quarter of 2023. Data from the third quarter indicate a continuation of the deterioration in the economic situation in the euro zone.

Decline in inflation around the world

In many economies, inflation is declining, although it remains relatively high. Lower raw material prices and the easing of tensions in global supply chains have reduced price pressure. At the same time, core inflation in most economies remains elevated, although it is gradually decreasing.

Economic slowdown in Poland

In the conditions of weakened economic conditions worldwide, a decline in the dynamics of economic activity was also observed in Poland. Preliminary estimates from the Central Statistical Office indicate that the annual GDP dynamics in Poland amounted to -0,6% in the second quarter of 2023, with further reduction in consumer demand. Despite this, investment continues to grow.

Falling inflation in Poland

Annual rate CPI inflation in Poland decreased and amounted to 10,1% in August 2023 (compared to 10,8% in July). It was mainly the decline in prices of food and non-alcoholic beverages that contributed to the decline in inflation. Core inflation is also on a downward trend.

Inflation expectations and restrictiveness of monetary policy

The decline in inflation is accompanied by lower inflation expectations, which increases the restrictiveness of monetary policy. The Monetary Policy Council is concerned about the lower demand pressure than previous forecasts.

Although it was not included in the announcement, a strong real exchange rate should be added to this puzzle, reducing the competitiveness of exports, which was dealt with shortly thereafter.

To sum up, the reduction in interest rates in Poland could be explained by the economic slowdown, falling inflation and concerns about the prospects for the global economy.

What can the MPC do this time and has the situation changed?

The situation does not seem to have improved significantly, apart from a strong drop in inflation in September, mainly due to low fuel prices. As stated by Orlen's representatives, the company does not intend to change its pricing policy, which may significantly affect disinflation in Poland, at least in the short term. The exchange rate also changed in favor of the competitiveness of the Polish economy.

In the meantime, the results of the macroeconomic survey have appeared NBP, in which inflation at the end of the third quarter of 2024 may amount to 6,1%. This means that the interest rate at the end of 2023 should be lower than 6%. The question is how much and when to cut it.

The argument for not changing rates in October is to wait for the November inflation projection. Then, according to the latest data, the Monetary Policy Council would have complete information and could make a decision based on it.

On the other hand, the Monetary Policy Council sees a weakening economic situation and deflationary pressure from enterprises, as well as a deterioration of the employment situation in this sector. Additionally, looking only at the latest inflation data, the short-term deflationary pressure in CPI inflation has also increased. This, in turn, may favor a decision to cut rates on Wednesday and another step in November. The market estimates the chances of a cut by 50 points, and the official consensus is 25 points.

How will it be? We will find out on Wednesday, October 4, at an unspecified time.