NBP extends pause, policy to stay loose for some time - Capital Economics
Emerging Europe Economics

NBP extends pause, policy to stay loose for some time

Emerging Europe Economics Update
Written by Liam Peach
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The Polish central bank’s latest forecasts, published this afternoon, tell a story in which the economic recovery will strengthen over the coming years and inflationary pressures will pick up strongly. But we think that policymakers will tolerate higher inflation and maintain our view for interest rates to remain at 0.10% until 2023, which is a much more dovish view than most analysts and investors.

  • The Polish central bank’s latest forecasts, published this afternoon, tell a story in which the economic recovery will strengthen over the coming years and inflationary pressures will pick up strongly. But we think that policymakers will tolerate higher inflation and maintain our view for interest rates to remain at 0.10% until 2023, which is a much more dovish view than most analysts and investors.
  • We had thought that the central bank would opt to lower interest rates at today’s meeting. The NBP is focused firmly on supporting the recovery and Governor Glapinski had previously tied the possibility of a rate cut to the emergence of a third virus wave. New virus cases have risen to a three-month high and this prompted the government to tighten some restrictions in the north of the country. Tighter nationwide containment measures may follow, keeping domestic activity depressed in the first half of this year.
  • In the end the NBP clearly thought that monetary conditions are loose enough and left the policy rate at 0.10%. The statement made no mention of a third virus wave but repeated the usual line that the pace of the recovery this year is uncertain due to the pandemic. The press statement noted that activity in the services sector had remained weak at the start of this year, while industry had continued to do well.
  • The focus of today’s meeting was on the NBP’s GDP and inflation forecasts in the March Inflation Report. In general, the forecasts tell a story of one in which Poland’s economy is likely to grow strongly over the next few years and inflationary pressures will pick up.
  • The central bank raised (the mid-point of) its GDP growth forecast this year from 2.7% to 4.0% and nudged down the 2022 forecast from 5.8% to 5.5%. This was partly due to statistical carry over effects as the drop in Q4 was shallower than the NBP had expected. But the NBP has also become more upbeat on underlying growth, forecasting growth of 5.4% in 2023. This puts the NBP in line with our above-consensus view.
  • Meanwhile, the NBP raised its inflation forecast for 2021 from 2.5% to 3.2% and in 2022 from 2.6% to 2.8%. This is most likely to reflect the sharp increase in tax and administered price effects this year. But what’s noteworthy is that the central bank forecasts inflation to accelerate in 2023 and reach 3.2%!
  • The central bank expects inflation to remain firmly above its 2.5% inflation target throughout the next three years. We will know more when the Inflation Report is published on 8th March but based on the latest GDP forecasts and the NBP’s analysis in November that the economy would have a positive output gap of 1% of GDP in 2022, the NBP must now expect this to reach 2.5% of GDP and to feed into inflation quickly.
  • Overall, this is similar to the view that we outlined in a Focus last month, with inflation picking up strongly in 2023. (See here and Chart 1.) But we don’t think this should bring forward expectations for monetary tightening. Poland’s central bank has a higher tolerance for inflation than most think and policymakers’ focus on supporting growth suggests to us that the bar for raising rates is high. We expect interest rates to remain at 0.10% until 2023, while investors expect 50bp of interest rate hikes by then. (See Chart 2.)

Chart 1: Poland Consumer Prices (% y/y)

Chart 2: NBP Policy Rate & Market Pricing (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Bloomberg, Capital Economics


Liam Peach, Emerging Europe Economist, liam.peach@capitaleconomics.com