Poland’s Monetary Policy Council (MPC) surprised the market by cutting the National Bank of Poland's (NBP) interest rates by 25 basis points. In our view, this decision is fully justified by the inflation prospects and the weak economic outlook. We expect further rate cuts after the summer holidays
Contrary to consensus expectations and the narrative from the June press conference, as well as statements from members of the Monetary Policy Council (MPC), the National Bank of Poland (NBP) has cut interest rates by 25 basis points. The reference rate now stands at 5%.
The decision was supported by recent data and the latest macroeconomic projection prepared by the National Bank of Poland, which likely played a key role in the rate cut. The inflation projection for 2025 has been lowered by almost 1 percentage point (to 4.0% year-on-year) compared to the March projection. The NBP's inflation projection for the following years has also decreased (by 0.3 percentage points in 2026 and 0.15ppt in 2027). According to the projection, CPI inflation will be 3.1% in 2026 and 2.4% in 2027 (compared to 3.4% in 2026 and 2.5% in 2027 in the previous, i.e., March round of forecasts). Meanwhile, GDP growth in the years 2025-2027 is expected to be 3.6%, 3.1%, and 2.5%, respectively (previously 3.7%, 2.9%, and 2.3%).
The main assumptions of the latest projection differ from our forecasts, especially in the context of inflation prospects. We are also slightly less optimistic than the NBP regarding GDP growth rates. In our view, GDP will grow by at least 3.2% in 2025 (and 3.4% and 2.8% in the following
Despite the downward adjustment of the latest inflation projection compared to the March NBP projection, we still consider it too pessimistic. We believe that the CPI index will average 3.5% in 2025 versus the NBP's 4.0% expectation. In our opinion, inflation should be around the central bank's target as early as July, and then decrease to 2.4% in 2026 and 2027. The NBP's pessimistic forecasts may result from the so-called cut-off date, which probably does not include the latest proposals for further freezing electricity prices in the fourth quarter of 2025, especially since they have not yet passed the entire required legislative path. Our forecast assumes an average inflation rate of 3.5% in 2025, assuming a further freezing of electricity prices.
This topic will likely be addressed in tomorrow's speech by the President of the National Bank of Poland. As a result, we believe there is still room for a deeper decline in inflation in the coming months than the assumptions of the July projection. For this reason, we maintain our expectations for further interest rate cuts after the summer holidays (as there is no decision-making meeting of the Council in August).
At the same time, however, the Council's statement continues to emphasise the uncertainty factors for inflation prospects. These consistently include:
On the other hand, compared to the June statement, today's MPC notes a slowdown in wage growth in the enterprise sector in May, which is a disinflationary factor. Also, the statement indicates that according to available forecasts, CPI inflation in the coming months will fall below the upper limit of deviations from the NBP's inflation target. Taking this into account, the Council considered it justified to adjust the level of NBP interest rates. The MPC therefore expects inflation to fall below 3.5%, which justified today's adjustment of NBP rates. If, according to our forecasts, inflation falls to around 2.5% as early as July, this will justify further significant rate cuts after the holidays.
In summary, although today's decision is surprising in light of Governor Glapiński's recent communication, it is justified due to the improvement in inflation prospects, which in our opinion remain still conservative as presented by the NBP. We maintain our scenario of further interest rate cuts in September and November (by 25 basis points each) and reductions in 2026. As a result, the target rate should be 4.00%. More about the next MPC decisions can be said after tomorrow's press conference by the President and interviews with MPC members in the coming weeks. However, we believe the NBP's communication is very unclear.
