The RPP (Monetary Policy Council) will not change interest rates Turing January’s sitting. Such a decision is much more likely to be made in March, when the newest macroeconomic prognosis of the National Bank of Poland. For this reason, the content and tone of the announcement to be made by the Council on Wednesday should attract greater attention, as it may signal a changed approach to monetary policy.
Interest rate cuts in March – though far more likely than this month – are far from a foregone conclusion. Although the NBP inflation target of 2.5 percent (with a +/- 1 percentage point fluctuation allowed) applies to the consumer price index, monetary policy has a far greater impact on the so-called base inflation. It does not include the most unstable prices of fuels, energy and foods and has recorded a slight increase in recent months (from 0.2 percent year to year in October to 0,5 year to year in December). In the same period CPI deflation increased from -0.6 percent to -1 percent year to year, which indicates a strong influence of decreasing prices of energetic raw materials.
An appeasement of the monetary Policy in march could be stopped by further data confirming a relatively good economic situation. Positive tendencies in the coming quarters is signaled by the PMI index for Polish industry in January which reached 55.2 points, significantly more than prognosed (a consensus of 53) and December’s result of 52.8 points. A value of over 55 points indicates a strong increase in economic activity, but a single positive PMI result is surely too little evidence to conclude that the economy is picking up the pace.
However, prognosed values of indexes are more important for the Council than current results. Each of the last few quarterly macroeconomic prognoses prepared by NBP lowered the forecast inflation path for the next two years. If March results show that it will take even more time for price dynamics to reach a level acceptable for RPP (the range of acceptable fluctuations around the inflation target), monetary authorities may find it hard to justify a refusal to further appease the monetary policy. Though the argument referencing the lack of impact of monetary policy on monetary prices seems rational, there is a certain risk with regards to the Council’s reliability when it comes to meeting the inflation target.
The EBC’s recent decision to buy treasury bonds has complicated the situation in which the Polish central bank has to conduct its monetary policy even more. As a consequence, the Monetary Policy Council will also have to take into account the growing risk of destabilization on the monetary market or Polish treasure bonds caused by possible mass influx and later drain of foreign capital.
Damian Olko, expert of Employers’ of Poland Research and Analyses Centre