NBP likely to lower interest rate by 50bps by end of Q3 2016

Since 2014, the labor market of Poland has been tightening, while wage growth has remained strong at 3%-4%. However, core inflation has continued to remain low and turned negative recently. This raises the question whether the labor market tightening will in itself help bring back inflation to the target rate of 2.5%, noted Commerzbank. The National Bank of Poland is likely to cut its key interest rate by 50 bps next quarter, added Commerzbank.

March’s CPI data came in below expectations. Headline deflation remained at -0.9% y/y, whereas core deflation reached -0.2% y/y in last month. Such trends penetrate the space of the CEE nations. In spite of a sharp rebound in economic growth that has reduced the jobless rate, inflation has no tendency to rebound.

Most of the central banks in the CEE region have recognized this trend and have considerably revised down their inflation projections. For example, the Czech National Bank is considering negative rates, while the Hungarian central bank has again stated lower rates.

However, the Polish central bank has kept its rates unchanged. Moreover, the MPC members are quite uncertain if lowering rates further will help. Just a few council members stated ‘cautiously’ that further lowering of rates will be supported if the inflation continues to be low after many months, noted Commerzbank.

The views of MPC are likely influenced by Poland’s rapid economic growth rate as compared to other CEE nations, according to Commerzbank.

“We forecast a 50bps lower benchmark rate by end-Q3, with risk of deeper cuts. From current levels, however, we do not see 50bps lower rates pressuring EUR-PLN upwards”, added Commerzbank.