Economic news

• INTEREST RATES: Poland’s Monetary Policy Council announced a 50 bp cut in May; consequently, National Bank of Poland’s policy rate has been lowered to 5.25%. The cut had been well expected by the markets and came as no surprise; however, investors who had been pricing an aggressive monetary easing path had to turn back after hawkish comments by NBP Chair A. Glapiński. Consequently, interest rate expectations implied from the 3x6 FRA contracts jumped from below 4.50% by approx. 25 bp. We maintain our forecast that there will be 100 bp cuts altogether in 2025 (i.e., 50 bp more after last week’s cut) and the next cut will take place in July. It is in line with Friday comments by MPC’s H. Wnorowski and L. Kotecki, both of whom reiterated that the next moves of the Council will be of standard size (25 bp), they will not happen before July, and that the potential monetary policy easing cycle will not be abrupt. 
• RATING: S&P rating agency upheld its A- rating of the Polish economy with stable perspective. This decision implies that Poland’s general government debt has not exceeded S&P expectations, as in this case rating downgrade could have been possible. S&P forecasts economic growth in Poland of 3,1% y/y in 2025 and policy rate of 4.75% by the end of the year. 
• BANKING SECTOR: Monetary financial institutions surveyed by the National Bank of Poland are becoming more optimistic regarding credit market perspectives. Polish banking sector sees improving quality of its credit portfolio, becomes more competitive, and does not face capital constraints in growing supply of credit; however, credit demand remains subdued, especially in the corporate sector. 
• UNEMPLOYMENT: Flash reading of the unemployment rate showed 5.2% in April, i.e. 0.1 p.p. below the March figure. 

Monetary doves are no longer out 

This month the MPC did not surprise, and the decision taken at the last Council meeting (a 50bp cut) came as expected. The Council made us wait 581 days for its next move (from October 2023 to May this year). One could deliberate whether this constitutes a record gap in the monetary easing cycle, or two distinct cycles – yet we leave those deliberations as they are. Yet, after a press conference by NBP Chair A. Glapiński, we can say with high probability that we will wait longer than 30 days for the next cut. This is quite a surprise, and it clearly goes against markets expectations to quote the Chairman, the monetary doves are no longer out.  

Policy rate and selected short-term interest rates (%) 

Source: Refinitiv, NBP, Pekao Research 

• Highlighting of the word adjustment (which in Polish denotes a single resolution, as opposed to a cyclical or long-term action) was no coincidence. Yesterday's decision, according to Chair Glapiński, was not the commence of a series of cuts, thus constituting a single adjustment. Interest rates were adjusted for a number of reasons already known from previous meetings: the fall in inflation below the previously forecast path, the deterioration in the labour market (rapid deceleration of wages and decline in employment), and slower than expected economic growth. The NBP estimates that GDP growth in Q1 was slightly lower than in Q4 of the previous year (we agree), and inflation shall fall to 3.4% y/y in Q3 (we also agree). 
• The upside risks to inflation, which did not get much attention last month, have returned. The NBP continues to treat uncertainty about the development of energy prices, the acceleration of economic growth this year, the scale of fiscal expansion, and the state of the labour market (wage growth still elevated) as a bundle of factors calling for caution in monetary policy. 
• Due to the aforementioned risk factors, the Council needs more data to make further decisions on interest rate cuts. When will such data become available? According to the NBP President, the Council is divided - for some of its members, July will be a good moment to cut interest rates again (NBP macroeconomic projections are published in July); while the rest of the Council would prefer to wait with such a decision until autumn. 
• This means that the idea of a rate cut at the June meeting is now dead, and truly extraordinary events would be needed to put it back in the game. We assume that huge surprises in the incoming macro data would be needed for this to happen. 
• This was probably the first and last cut of more than 25 bp at once. In the months ahead, the MPC will move in standard steps of 25 bp per meeting (regardless of when it actually happens). Interestingly, while yesterday's cut was an adjustment, the next cuts will already be treated by the Council as a cycle. 
• Quite unexpectedly, the NBP President implied that the Council could lower required reserve rate during its June meeting. 

All in all, this means that the road to lower interest rates has become bumpier, yet not necessarily longer. Before the last meeting, we had assumed that the MPC would cut interest rates by 100bp this year. The May meeting, like the April meeting before it, brought changes in the timing of the cuts, but we see no reason to depart from the cumulative scale mentioned above. We tentatively assume that the next move will be in July (-25 bp) and will continue after the holidays (also -25 bp). The target rate is still 3.5% and will be reached by the end of next year. 

Financial market update

Last week at the Polish financial market has been driven by domestic monetary policy. After a 50 bp cut on Wednesday and quite hawkish forward guidance by the central bank’s President on Thursday, Polish zloty strengthened and POLGB yields went up. Appreciation of PLN against EUR was substantial, taking EURPLN from 4.28 below 4.24. USDPLN was relatively stable – strengthening of the PLN was offset by Fed Powell’s wait-and-see comments; consequently, USDPLN generally remained in a 3.76-3.79 range. In the FI market, investors came back to their positions from early April, i.e. they abandoned hopes for a quick, aggressive monetary easing. Consequently, 10Y bond yield rose to its early April values of above 5.35.  The stock market grew by some 5%, fueled by immediate sentiment improvement triggered by the interest rate cut, as well as optimistic rating reviews by international agencies. This week shall be relatively calm with lower volatility; yet, if there happens to be a surprise in the 1Q25 GDP growth reading (or growth structure), it may trigger some market adjustments. However, there are low chances that such a surprise eventually happens: consensus on the investment contribution to growth remains low, and data from the US allows to safely bet on significant growth of inventories ahead of the 2Q25 growth in trade tariffs.