European Central Bank: It is better to wait than to risk an increase in inflation 

today European Central Bank did not lower interest rates. Likewise, the Fed will leave rates unchanged next week. Our Monetary Policy Council will not reduce rates in the coming months either. The moment of the first reductions is postponed, towards the second half of the year. However, the very prospect of reductions has a positive impact on financial markets.

The ECB left rates unchanged

The same thing awaits us next week from the site FED, as part of the January 31 decision. The Polish Monetary Policy Council will most likely not revise interest rates on February 7. The moment of the first rate cuts in the US and Europe is inexorably approaching, although they will take place later than we expected a few months ago.

A factor influencing expectations of a rate cut is a significant drop in inflation. In the euro zone, inflation in December was 2,9%, while in October 2022 it peaked at 10,6%. The decline in inflation is primarily due to the decline in energy prices, and food prices, although they are still rising, have slowed down significantly. According to the latest ECB forecasts, inflation in 2024 is expected to amount to 2,7%. in 2024 and 2,1 percent in 2025 and 1,9 percent in 2026. The second element is the prospect of economic growth, or rather its lack. The euro zone is currently struggling with stagnation, and some countries even with recession. Easing monetary policy could help improve the economic situation.

The market expects that rates in the euro zone will fall in April at the earliest, and by the end of the year they will fall by 1,25 percentage points (from the current level of 4,5%). However, bank representatives, including Christine Lagarde, indicate that all decisions will be made based on the assessment of current economic data, which is interpreted as an announcement that the cuts will be postponed. This is due to fears of a return to higher inflation due to upward pressure on wages. Forecasts indicate an increase in wages in the euro zone by 4,6%. this year, i.e. above the level of 3%. considered safe for maintaining inflation around the target. The ECB, in line with some announcements, may wait to reduce rates until it receives data on wages in the first quarter. The publication of these data will take place in May this year, which means that the first reduction may not take place until June.

We are also waiting for the start of rate cuts in the USA

The market predicts that - according to the most likely scenario - the first rate cut in the US will take place in May, and by the end of the year rates will fall by 1,25 percentage points. The level of inflation and the good situation on the labor market are also important here. The USA is doing much better economically than Europe, which may be an argument for delaying rate increases.

In Poland, the reference rate NBP is currently 5,75 percent. In September and October, the Monetary Policy Council reduced rates twice, by a total of 1 percentage point. We expect that there will be further interest rate cuts this year, but they will start in the second quarter at the earliest. Poland is still struggling with high inflation, which amounted to 6,2% in December (annual average throughout 2023 was 11,4%).

Inflation is constantly falling, but a sudden increase is possible if the government withdraws from reducing VAT on food or freezing electricity prices for consumers, and such decisions are likely this year. According to the latest forecast by S&P Global Ratings, inflation in Poland will average 6%. in 2024 and 4,1 percent in 2025. Only in 2026 will inflation reach an average of 3,4%. which means that it may approach the NBP inflation target of 2,5%. with a deviation of 1 pp. These levels are higher than those expected in the central path of the November NBP projection. This may encourage the Monetary Policy Council - similarly to the USA and the euro zone - to delay decisions on further rate cuts.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.