The Polish central bank cut the key policy rate by 25 bps to fresh record low level of 2.50%. The decision was in line with our expectations and consensus of market forecasts. Market reaction to announcement of decision on rates was hardly visible as everyone expected post-meeting statement and press conference scheduled for late afternoon.
The post-meeting statement was more upbeat on economic prospects (less dovish) than in previous months. Decision on next rate cut was justified by saying that “a risk of inflation running below the target in the medium term persists”. At the same time, however, the statement read that “from the second half of 2013 – together with the expected improvement of global economic activity – a gradual acceleration of GDP growth can be expected, which will be conducive to rising inflation in the coming years”.
The more optimistic assessment of economic prospects is based on fresh NBP projections for inflation and GDP. While central projections for both inflation and GDP were lowered for the whole horizon (2013-2015), the downward revision was slight and the projections still point to gradual economic recovery and inflation rise in the medium-term.
In the key paragraph of the post-meeting statement the MPC wrote that “the significant reduction of NBP interest rates implemented since November 2012 supports economic recovery and limits the risk of inflation running below the NBP target in the medium term” and “the decision to lower NBP interest rates made at the current meeting ends the loosening cycle of monetary policy”. This means that the MPC has changed informal policy bias from easing to neutral. Next rate cuts could take place only in case of considerable change in prospects for the economy and inflation.
Comments from MPC members at the press conference were even more upbeat on growth outlook that the post-meeting statement. Although NBP governor stressed that optimism regarding chances for economic recovery should be cautious, he has not mentioned so many arguments supporting recovery scenario for a very long time. Belka said among others that “the worst is behind us, we want to send a signal for economy that revival is coming”.
Comments from NBP governor Belka on situation on the FX market and possible central bank’s interventions were restrained. He only said that the NBP is ready to enter the market from time to time, if the PLN volatility is too large.
Given very clear message from the MPC, we think that monetary easing in Poland has come to an end. We expect that NBP interest rates will remain unchanged at least until the end of this year (prof. Belka explicitly said that rates will most likely stay flat at least by the end of this year) and most likely well into 2014. We predict that the first rate hike (a cautious one) could take place in the second half of the next year when we see GDP growth in Poland to reach nearly 3% y/y and CPI inflation slightly above the target of 2.5% while real interest rates (by definition given by the MPC it is the key policy rate deflated with inflation expectations of market analysts) will start to enter negative territory (so much undesired by Polish central bankers who want to run “conventional” monetary policy, i.e. to keep positive real interest rate).
Market reaction to the post-meeting statement and comments at the press conference was quite strong. What is interesting, the PLN visibly gained, even despite clear rise in market interest rates (including rise in bond yields across the curve). This is contrary to what we have observed over the past weeks when the PLN was weakening along with sell-off in the Polish fixed income market. Such a reaction suggests that sell-off in Polish bonds by foreign investors has been at least briefly suspended and for sure it was not intensified by decisive indication of the end in easing of domestic monetary policy. We predict that in the near term the PLN will remain under pressure related to sell-off in EMs assets and currencies, but later in the year the Polish currency should regain ground and EURPLN will move towards 4.05 at the end-2013.
Nordea