Economic news

• INTEREST RATES: The MPC decided last Wednesday to reduce the reference rate by 25 basis points to 4.50%. The post-meeting statement indicated that the adjustment of rates results from an “improvement in the inflation outlook in the near term”. Compared to the wording of the September statement (“taking into account the inflation developments”), the current statement has a stronger forward-looking character. We believe the improvement in inflation prospects is primarily due to the freezing of energy prices until the end of the year. The signaled approach by the MPC suggests that we will see another rate cut in November, with the year ending with rates at 4.25%. Additionally, Thursday’s press conference by the NBP Governor had a moderately hawkish tone. Although Adam Glapiński acknowledged that MPC members see room for further rate cuts, when discussing the target rate level, he cited relatively high figures of 3.75-4.0%. He also devoted considerable time to explaining reasons for caution in further monetary easing. However, we believe that the November NBP projection will address many of these concerns, and the MPC will once again, for the last time this year, cut interest rates by 25 basis points.
• GDP: Statistics Poland revised its GDP readings for 2024. The corrected GDP growth rate was 3.0% yoy, up from 2.9% yoy in the previous estimate. The downward revision concerned private consumption (2.9% yoy vs. 3.1% yoy before correction), while upward revisions were recorded for public consumption (8.7% yoy, +0.5 ppts), investments (-0.9% yoy, +1.3 ppts), and imports (4.5% yoy, +0.3 ppts). While the overall picture of last year’s economic growth in Poland did not undergo radical changes, it is worth noting the investment figures, which, as it turns out, only experienced a slight decline.
• MPC: The 25 basis points cut in October significantly reduces the room for further monetary easing in 2025, stated MPC member Cezary Kochalski. Another MPC member, Ludwik Kotecki, assessed that the October rate cut should be the last one, with November and December being months for the Council to observe the effects of the recent rate cuts. He added that inflation is expected to reach the target within a few months, at which point further easing could be considered.
• LABOUR MARKET: The Ministry of Family, Labour and Social Policy reported in a preliminary estimate that the registered unemployment rate rose from 5.5% in August to 5.6% in September, in line with most forecasts. This marks another month in which increases in the unemployment rate are somewhat higher than seasonal patterns would imply due to regulatory changes that took place in June. In our opinion, this is the last month in which we will observe the effects of regulatory changes facilitating registration and delaying deregistration of the unemployed.
• CREDIT: According to the Credit Information Bureau (BIK), in September, demand for mortgage loans increased by 42% yoy, with 39.9k credit applications submitted in that month. This indicator currently stands slightly above its historical average, implying that over PLN 9 billion in new loans were granted in September. This suggests, even at the current level of interest rates, a significant pent-up demand in the housing market.

The NBP governor rather hawkish, but we still expect a cut in November

October press conference by the NBP governor Adam Glapiński was rather hawkish. This might suggest a cautious approach by the Monetary Policy Council (MPC) to further rate cuts, were it not for the fact that previous press conference was also hawkish, which did not prevent the Council from cutting rates again in the previous week. The macroeconomic environment, particularly declining wage growth and inflation within the range of permissible deviations from the inflation target, favours interest rate cuts, and we expect the MPC to take this step in November as well – despite its current declared caution. This is especially true given the arguments against such a decision presented by Adam Glapiński are not particularly convincing. Let's list them:

1. While CPI and core inflation are within the broadly defined NBP target (2.5% -+ 1 percentage point), they remain closer to its upper limit than its lower limit. Therefore, there is a greater risk that price growth will prove too high than too low. The MPC wants to avoid a scenario where it first lowers rates too quickly, only to increase them again shortly after.

2. Electricity prices have been frozen, but only until the end of the year. There is a risk they will rise in 2026.

3. From 2027, the European Union plans to expand the ETS emissions trading system from the energy sector and energy-intensive industries to include fuels for personal transport and building heating. This means an increase in fuel and heating taxation and the risk of a sharp increase in inflation, by as much as 2 percentage points.

4. Although wage growth has slowed significantly (to 7.2% yoy), it remains faster than productivity growth. This means it continues to exert pro-inflationary pressure, as does accelerating GDP growth, especially in private consumption.

5. Fiscal policy remains very loose, which in the medium term generates risks to Poland's macroeconomic stability and inflation, for example, through a weakening zloty (assuming potential investor withdrawal from the Polish currency).

While all these points are not without foundation, it is worth noting that inflation risks have significantly diminished over the past month: energy prices have been frozen, wage growth is declining faster than expected and inflation rates are steadily declining. The future is, of course, still fraught with uncertainty, but the most likely scenario will be the Monetary Policy Council's November inflation projection. In our opinion, it will show that energy prices will not rise in 2026, wages will continue to moderate, and inflation will permanently remain within the narrowly defined target of 2.5%. When forecasting the course of the October meeting, we assumed that the Council would want to wait for the projection to confirm all this. However, as it turned out, it did not need such confirmation and saw room for rate cuts earlier. We believe it will not stop there and will decide to cut the reference rate next month, ending the year with a reference rate of 4.25%, which is 25 basis points lower than we previously expected. Next year, it will continue its cuts to 3.50%, with risk on the downside. The NBP President Glapiński spoke about the room for further rate cuts, albeit in a very general way and on a smaller scale than we did – he mentioned 4.00% as the target for the time being.

Finally, it's worth adding that the domestic financial market is very cautiously pricing in a further path of interest rate cuts for now, as if they were about to reach the target level in this cycle soon. The high yield on Polish 10-year bonds can also be explained by concerns about fiscal health. However, yields on short-term 2-year bonds are also very high, considering the still early stage of the monetary policy easing cycle we are in. The market's caution can be justified by the painful lesson learned in the fall of 2023, when two interest rate cuts (by a total of 100 bps) were followed by a two-year pause in further reductions. We believe this scenario will not be repeated this time. Therefore, we see room for a decline in Polish debt yields.

Interest rates have started to fall, bond yields have not

Source: Macrobond

Financial market update

Last week’s interest rate cut by the Monetary Policy Council was only partially priced in by the markets. Although Governor Adam Glapiński’s press conference had a moderately hawkish tone, the markets opted to price in somewhat faster and deeper monetary easing. Polish government bond yields declined sharply towards the end of last week, with the 10-year yields dropping by a total of 10 basis points, from 5.55% to 5.45%. Meanwhile, the zloty depreciated, especially on Friday, partly driven by the escalation of tensions between the U.S. and China and the increase in global risk aversion. The EUR/USD pair moved by a full figure, from 4.255 to 4.26. This week, we expect sideways trends for both the zloty and government bonds. Geopolitical developments are currently not significant enough to break EUR/PLN out of its several-month consolidation, and the more dovish stance of the MPC has already been priced in. Key domestic data—including wage growth, industrial production, and retail sales—will be released only next week.