Lower-than-expected Poland inflation = interest rate cut in May
Another, but this time a small one but still, disinflationary surprise - the flash estimate of Polish consumer inflation (CPI) showed a strong drop in April to 4.2% yoy from almost 5% in the first quarter. Market expectations were at 4.3% yoy. This is next, sufficient argument for the Monetary Policy Council to cut interest rates at the nearest May decision meeting, in our opinion by 50 bps.
However, it must be added right away that the April decline in annual inflation was greatly supported by the high reference base, mainly on food prices after last year's return to higher VAT rate. In turn, month-on-month, consumer prices increased by 0.4%.
Decomposition of decline in annual CPI (%yoy, percentage points)
Source: Statistics Poland, NBP, Pekao Research
CPI vs. core inflation (%yoy)
Source: Statistics Poland, NBP, Pekao Research
The uncertainty and fears of slowdown in global economic growth (see the trade war initiated by the US) have recently caused commodity prices to fall significantly, including crude oil. Lower oil market prices are already visible at petrol stations – in April fuel prices fell by almost 2% mom (since March they have already fallen by 4% and that is not the end yet). Overall, this will be an additional factor keeping the inflationary pressure on goods low in the near future.
In turn, energy prices surprised slightly, falling by 0.4% mom in April. Not much, however, it has tipped the scales at lower than expected reading of the overall CPI index for April. In two weeks, we will find out from the final detailed data what was behind this surprise.
According to today's data, we estimate that core inflation (i.e. excluding energy and food prices) fell slightly in April to around 3.5% yoy. Thus, for the first time since mid-2021, it fell into the range of permissible deviations from the inflation target. However, the momentum of core prices remains elevated and is decreasing very slowly.
Inflation momentum (annualised, 6MMA)
Source: Statistics Poland, NBP, Pekao Research
Prices of food and non-alcoholic beverages have increased quite significantly in April, up 0.8% mom compared to the previous month. There are many supply factors here, including the bird flu epidemic drastically reducing supply, which significantly increases prices of eggs and poultry. Similarly with the ASF and FMD diseases in the case of pork. Taking into account also last year's poor harvest of agricultural products and the expected low supply this year related to difficult weather conditions, we expect that growth of food prices still will be elevated throughout 2025. This issue also applies to the prices of beverages, including coffee and fruit juices.
In the entire second quarter, CPI in Poland will remain close to 4%. In turn, at the beginning of the second half of the year, due to base effects (this time on energy), we will see another downward dip to around 3% yoy. At the end of 2025, inflation may even fall below this level. However, core inflation will not want to fall so quickly throughout the year, amid slowly translating high labour costs and closing demand gap. We will not return to the NBP inflation target permanently until the first half of 2026.
April inflation, together with rather weak data readings from Poland’s real economy (industry, retail sales, construction) will be a sufficient argument for the MPC to cut rates at the May decision meeting, in our opinion by 50 bps.
Poland inflation outlook (Pekao Research forecast, %yoy)
Source: Statistics Poland, NBP, Pekao Research
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