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The National Bank of Poland surprised markets on Wednesday with a steep cut in its benchmark interest rate, changing course on monetary policy ahead of other central banks and before a fiercely contested national election.
Rate-setters lowered borrowing costs to 6 per cent from 6.75 per cent. Analysts had predicted a cut before next month’s vote, but most expected 0.25 percentage points, since Polish inflation remains in double digits and far above the EU average.
Some economists had warned that the central bank, led by its president Adam Glapiński, was unduly influenced by the goals of the ruling Law and Justice party (PiS), seeking a third consecutive term in office following the parliamentary election on October 15.
Still, the size of Wednesday’s cut was “a shocker”, said Bartosz Sawicki, market analyst at brokerage Conotoxia, since it was also out of line with Glapiński’s own guidance about gradual monetary easing once inflation fell below 10 per cent. The Polish zloty fell almost 2 per cent against the euro after the rate reduction was announced.
Although Polish inflation has dropped steeply in recent months, consumer prices still rose 10.1 per cent in August. Economists also worry that core price pressures — which discount for changes in volatile items such as food and energy and are seen as a better gauge of underlying inflation — remain high.
The Czech and other central banks in the region are also likely to lower rates in the fourth quarter, but “in a more cautious manner”, Sawicki predicted.
Poland’s rate-setters “chose radicalism in monetary policy”, said Jakub Borowski, Poland chief economist at Crédit Agricole. “In our opinion, in recent months there has been no sharp deterioration of the economic situation in Poland and thus there was no justification for such a strong reduction in interest rates in one step.”
Glapiński, 73, was appointed to the bank’s monetary policy council in 2010 and has a longstanding personal relationship with party leader Jarosław Kaczyński. He commands the support of the majority of the members of the council.
The rate cut could help Polish businesses that have struggled to cover their borrowing costs since the autumn of 2021, when Poland’s was among the first central banks to raise rates.
In a statement following the rate-setters’ decision, the central bank highlighted a weakening of Poland’s economy in the second quarter, driven by lower consumption, as well as a decline in producer prices that also raises the likelihood that inflation will continue to fall in coming quarters.
Poland was “outrunning the market expectations by six months”, said Erste Bank in a research note. After such a big cut, Erste said it expected no more changes in Polish rates until the year-end, with a possible further reduction in the first quarter of 2024.
