PL: A subtle dovish turn by the MPC

Despite another downward inflation surprise on Monday, the Monetary Policy Council of the NBP decided to maintain the key interest rate at 5.75%. This decision aligns with both the consensus and our expectations. Our focus, however, was on today's press statement. While the MPC appears cautious, the tone and wording changes in the statement suggest a more dovish sentiment.

Since October 2023, Poland's base rate has remained at 5.75%. Although the restart of monetary easing has been anticipated several times, the MPC has consistently opted for a cautious approach, delaying rate reductions. Nevertheless, the pressure to cut rates has increased since the start of the year, with wage growth declining and inflation rates remaining below 5% year-on-year. Additionally, the NBP's inflation projections from March, which indicated a resurgence of inflation, became inaccurate shortly after their release due to changes in CPI weights from GUS.

The press statement highlighted weakening economic conditions both in the US and domestically, which could in our view favor earlier rate reductions. Furthermore, the downward surprises in headline inflation were acknowledged, indicating that inflation in subsequent quarters may be lower than previously expected. The statement also omitted the sentence regarding a medium-term return of inflation to the target under unchanged monetary policy, which we interpret as another dovish signal. The decrease in core inflation was noted, yet the MPC remains concerned about the upside inflation risks stemming from further deregulation of energy prices. Another source of inflation uncertainty arises from developments abroad, influenced by changes in trade policies of major economies.

In summary, today's press statement acknowledges the lower inflation path than the one predicted by the NBP, shifting its sentiment slightly towards a more dovish stance. In our view, barring any significant surprises, the first 25 basis point rate cut should occur in July, followed by two additional cuts by the end of the year.