MNI NBP Review - June 2023: Psychology Of Single Digits

Executive Summary:

• The NBP left interest rates unchanged and delivered a largely unchanged statement.
• Policymakers refrained from formally ending the rate-hike cycle.
• Governor Glapinski outlined conditions for potential interest-rate cuts.

Full review document including a summary of sell-side views here:

MNI NBP Review - June 2023.pdf

The National Bank of Poland left interest rates unchanged and delivered another uninspiring statement, which echoed familiar messaging while keeping the rate-hike cycle formally open. During his press conference, Governor Adam Glapinski sought to convey a sense of optimism and predicted that Polish economy is heading for a “soft landing.” The official flagged expectations of quick, broad-based disinflation in coming quarters, which could see price growth slow to single digits in September. Should this materialise, the Monetary Policy Council would review available evidence to see if the disinflationary trend is durable over the medium term in assessing the case for loosening monetary policy.

The market interpreted this week’s monetary policy decision and Governor Glapinski’s press conference as slightly dovish. The fact that the official effectively walked his audience through what the process of discussing interest-rate cuts would look like, while dropping hints on its potential timeline, suggests that he has at least a rough blueprint in mind. The Governor was careful not to go into overdrive with dovish rhetoric – he mentioned that the hiking cycle is still formally open although most see it as effectively over; he flagged readiness to tighten if unexpected price shocks emerge; and he stressed that rates would only be lowered if the Council is confident that the disinflation trend is durable. We continue to see such comments as little more than lip service intended to avoid derailing favourable macroeconomic trends by pressuring market rates with overly triumphant rhetoric.

That being said, it remains to be seen whether macroeconomic trends will justify lowering interest rates as soon as this year. While the bias of this MPC is clearly skewed towards earlier cuts, policymakers will need strong arguments to back any decision to loosen monetary policy and avoid accusations of yielding to political pressure. The issue of central bank independence may feature more prominently in the public debate ahead of the upcoming parliamentary election, especially after MPC members started commenting on fiscal commitments made by competing political parties. Going forward, incoming data and the July edition of macroeconomic forecasts will receive close scrutiny, helping market participants reassess whether wider trends could provide the MPC with arguments for cutting rates in 2023. Given the NBP’s view that its expectations are being “fully realised,” the prospect of monetary loosening by the end of this year seems to be very much on the table.