Poland’s Central Bank Holds Rates Steady

Poland’s central bank has held its interest rates steady for the fifth consecutive month, as policymakers weigh the impact of steadily easing inflation against the possibility of rising consumer prices later in the year. The rate-setting Monetary Policy Council (MPC) maintained the benchmark rate at 5.75% on Wednesday, aligning with the consensus among 35 economists surveyed by Bloomberg.

Despite expectations that the MPC might change direction, uncertainties regarding a proposed zero-tax rate on food and a power price cap prompted the council to maintain its current policy. Prime Minister Donald Tusk has indicated that Poland might restore a 5% value-added tax (VAT) on food, with a final decision on the matter anticipated this week. Additionally, the government is contemplating measures to shield consumers from rising power costs, though these measures are unlikely to match the scale of existing policies.

“If higher VAT on food products is restored and energy prices are raised, inflation might increase significantly in the second half of 2024,” the central bank stated. The statement noted that future price growth carries “substantial uncertainty.”

Inflation in Poland dropped to 3.9% in January, down from its peak of 18.4% in February 2023. Despite this significant decrease, the central bank’s latest projection still forecasts inflation this year at between 2.8% and 4.3%, which is lower than previously reported. The same report predicts gross domestic product (GDP) growth to accelerate to as much as 4.3%, exceeding the central bank’s earlier expectations.

Governor Adam Glapinski signaled last month that the benchmark rate would remain stable for the rest of the year due to prevailing uncertainties. However, some officials believe there may be room to lower borrowing costs in the future. Monika Kurtek, chief economist at Bank Pocztowy, suggested that rates are unlikely to change in the near term, with a possible rate cut towards the end of the year. “We can see significant concerns over inflation beyond the first quarter,” Kurtek said.

Following the rate decision, the Polish zloty gained as much as 0.4% against the euro, approaching a four-year high and ranking among the best-performing emerging-market currencies alongside South Africa’s rand. Short-duration bonds saw a decline, causing yields to rise.

Attention now turns to Glapinski’s press conference, scheduled for Thursday at 3 p.m. local time, for further insights into the central bank’s outlook. Bank Millennium analysts, led by Grzegorz Maliszewski, suggest there may be room for a small rate cut at the end of the year, especially with anticipated rate easing in the US and euro area. Despite potential changes, the MPC has communicated its intention to maintain a steady rate path for the foreseeable future.