Will the MPC start a series of interest rate cuts?

Today, we will likely see an interest rate cut in Poland, and the Polish zloty shows no signs of weakness. While the Monetary Policy Council has lowered interest rates several times over the past two years, it still maintains them at very high levels. It's becoming increasingly difficult to find a justification for why restrictive monetary policy shouldn't change while inflation is practically flirting with the target. NBPThis is a very good time to say that a full cycle of interest rate cuts in Poland is likely ahead of us.

The 5% reference rate is currently over 2 percentage points higher than the current CPI inflation rate. While the data coming from the Polish economy do not justify the central bank adopting a 'completely dovish' stance, they certainly allow for cautious optimism. This means that, under current market conditions, interest rates in Poland should (and likely will) decline. In the longer term, by a fairly significant margin. The Council could cut rates by 25 basis points today, although even a 50 basis point move could be justified—if, afterward, the Council were to revert to a 'wait and see' stance.

It's hard to imagine rates remaining in the 4,75–5% range if inflation were to hover around 3% year-on-year (or lower, as recent data have shown). A 50-basis-point cut in the next two meetings remains a realistic scenario this year, but the real "relief" for borrowers could come next year, when rates could fall another 100 basis points, to 3,5%. Even such a level would seem very conservative. All this, provided that price pressures don't cause markets an unpleasant surprise. And is there any reason to fear that? Under current conditions, not particularly.

Firstly, energy prices in global markets have fallen significantly, and geopolitical conflicts are not the only factor affecting global markets. The Polish zloty is very strong, which naturally supports the fight against inflation, as are lower-anchored inflation expectations. Recent data on annual wage growth was disappointing; it fell below the year-on-year growth rate of the minimum wage. While retail sales and consumption rose above forecasts in July, this factor may be due in some areas to "summer sales" on furniture and appliances. The Polish consumer isn't out of breath, but neither is he in a phase of "consumer overdrive." Data from the industry and construction sectors still indicate a shortness of breath, and many businesses are still feeling the sting of high mortgage payments.

The inflationary experiences of recent years have led households to consider savings and investments in slightly different terms, often at the expense of discretionary spending. A rate cut in Poland doesn't necessarily have to be unambiguously negative for the złoty if the country's economic situation remains favorable. The chances of a recession are practically nonexistent under the current circumstances, which means that the Polish złoty could still have favorable winds. This is especially true if we see a further decline in the dollar index in the coming quarters. Polish bond yields remain attractive compared to Western treasuries.

Looking at the steam chart EURUSD, we're seeing a fairly significant rebound, after falling to 1.16. Today's macroeconomic calendar is quite busy. Investors are awaiting PMI data from the eurozone, the JOLTS report, and orders from American factories. The Monetary Policy Council's decision is expected around 15:00 PM. At 10:48 AM, the euro is trading at 4,26 PLN, the dollar at 3,67 PLN, the Swiss franc at 4,55 PLN, and the pound sterling at 4,89 PLN.

Author: Eryk Szmyd Financial Markets Analyst XTB