Diminishing deflation in Poland may replace expected rate cuts in 2016

The Polish Monetary Policy Council decided to leave its benchmark reference rate at 1.5%, which is in line with market consensus. The updated inflation and GDP projections contained minor changes, neutral for the Council and market. In our opinion, personnel changes on the Council (March 2016) will not automatically lead to interest rate cuts. Poland should exit deflation in Q1 2016, and rate cuts are not so certain. Diminishing deflation and real rates may replace expected rate cuts. The scenario of rates remaining stable for longer is still quite feasible.

This was the first meeting held since the general elections. The Council kept interest rates unchanged. According to central bank governor Marek Belka, the 2016 budget bill, formulated by the outgoing government, leaves no room for fiscal easing.

"In our opinion, the expenditure rule significantly limits potential, additional expenditure in 2016. The new government will start by implementing new taxes. These will include a tax on either banking assets or on all financial transactions, and a 2% retail sales tax on large retailers", says Societe Generale.

Some representatives from the new ruling party Law & Justice (PiS) have suggested that deficit could be higher than expected by several billion PLN. The NBP's updated inflation report contained minor changes to the CPI and GDP projections, which will be neutral for the market. The NBP expect slightly lower inflation in the short term. There is a 50-percent probability that the annual CPI growth will be in the range of -0.9 to -0.8% in 2015 (as compared to -1.1 to -0.4% in the July 2015 projection), 0.4 to 1.8% in 2016 (0.7 to 2.5%) and 0.4 to 2.5% in 2017 (0.5 to 2.6%).

At the same time, the NBP expects GDP growth rate in the range of 2.9 to 3.9% in 2015 (as compared to 3.0 to 4.3% in the July 2015 projection), 2.3 to 4.3% in 2016 (2.3 to 4.5%) and 2.4 to 4.6% in 2017 (2.5 to 4.7%). This is the last report by the current Council. The next one (in March 2016) will be released by the new Council.

Personnel changes on the Council (eight new members starting in March 2016 and a new NBP governor beginning in July 2016) will definitely impact monetary policy next year. PiS representatives are already suggesting that there is scope to cut Poland's benchmark interest rate from 1.5 percent, arguing that borrowing costs are higher than in the euro area. Some economists and investors are starting to expect easing next year. However, rate cuts are not certain for next year.

"We think the implementation of some of the new government's measures could stimulate inflation. In our opinion, Poland should exit deflation in Q1 2016, and the rate cuts expected in March or April (already priced by the market) are not so certain. We think the scenario of rates remaining stable for longer is still quite feasible", added Societe Generale.