PL: Target rate was finally reduced

After nineteen months of anticipation, the Monetary Policy Council of the National Bank of Poland has decided to lower the key interest rate from 5.75% to 5.25%. This reduction was widely anticipated by the market, although the next actions of the MPC remain a subject of discussion. The press release was rather brief, highlighting the primary reasons for this decision.

The first reason is the economic climate in Poland, which signals that the annual dynamics of economic activity in the first quarter of 2025 were likely below expectations and slightly lower than the previous year. Another contributing factor is wage growth, which, despite remaining at a high level, shows signs of a gradual decline. The most significant factor is the headline inflation, which decreased to 4.2% year-on-year in April, driven by base effects and lower energy prices, particularly fuels for transportation. According to the National Bank of Poland, core inflation also appears to be on a downward trajectory.

The MPC also expressed concerns about certain aspects of the economy. These include the formation of demand pressures, the labor market situation in the coming quarters, the level of administered prices of energy carriers, and further fiscal policy actions, all of which remain sources of uncertainty. Therefore, future decisions by the Council will depend on incoming information regarding the outlook for inflation and economic activity.

In our current assessment, the MPC may refrain from making further rate adjustments in June, opting instead to await confirmation of the disinflationary trends and the new inflation and growth projections scheduled for July. However, if the data keeps surprising to the downside, another cut would be on the table already in June. Overall, we anticipate an additional 50-75 basis points worth of cuts by the end of the year.