The Council did not lower the rates and the zloty strengthened. What next with inflation in Poland?

The Monetary Policy Council surprised again yesterday. The economists' consensus indicated a cut in interest rates by 25 basis points, but the Council decided that rates had to be cut very sharply before the elections (by a total of 100 basis points), and after the elections there are many unknowns and we have to wait.

How difficult is it to predict the Monetary Policy Council's decisions?

How surprising are the Monetary Policy Council's decisions and how unclear is the communication with the market and citizens is shown by these statistics, where out of the last 14 changes in interest rates in Poland, economists managed to correctly indicate them in advance in 6 cases. It is worth emphasizing that in the past the conference was held after the decision on rates and was attended by, apart from the President of the NBP, also members of the RPP. Today we have a 2-hour speech by the MPC chairman without specifying the positions of other Council members.

Prices regulated are a great unknown for the Monetary Policy Council

The Monetary Policy Council said in a statement that it is not changing rates at the moment because it is not known what will happen to regulated prices in Poland, i.e. whether the shields will be extended, what electricity prices will be like in the new year, whether VAT on food will return, etc. It is worth recalling that for years the president of the NBP has distanced himself from the fact that the Council has no influence on a number of prices, such as garbage collection fees or crude oil prices, and decisions were made without taking into account these prices. But now they become important.

Inflation outlook - latest projections

Apart from the continuation of the communication confusion and another scandal surrounding the president NBP and the situation of the NBP Management Board, although this is probably what the press conference will focus on today (hopefully not), the outlook for inflation is still not optimistic.

The latest projections were presented in the announcement accompanying the decision. Thus, the average annual inflation in 2024 is expected to be 4,7%. (middle of the range), and in 2025 it is expected to drop to 3,8%. What does it mean? Well, in the first half of next year, y/y inflation in Poland has a chance to reach the inflation target (at least its upper deviation of 3,5%). However, this would be the end of the good news, because later in the year, inflation could return above 5,5%. . y/y.

Rate hike in mid-2024?

This, in turn, could mean that the Council would have a chance to correct the pre-election cuts and slightly suppress inflation at the end of 2024 by raising interest rates in the second quarter of 2024 (this is an assumption based on the current state of knowledge regarding the data).

PLN reaction to the MPC decision

The zloty strengthened after the decision because its interest rate did not fall as the market expected. The EUR/PLN exchange rate dropped from 4,42, i.e. to the lowest level since October 17, when the zloty was strengthening after the elections. The October minimum is around 4,41, and the next potential support may be near the July low at 4,39.

Tonight, in the short term, exchange rates may be influenced by the speech of Jerome Powell, who takes part in a panel discussion on monetary policy. The event is scheduled to start at 20:00 p.m. Polish time.

In the longer term, higher inflation and a strong exchange rate do not seem to go hand in hand. The real exchange rate is still very strong, which is not entirely positive news for the economy. Nevertheless, this is good news for those who are going outside our country this winter. The purchasing power there may be higher than before.