RPP keeps rates steady in January

2010-01-28

The Monetary Policy Council (RPP) left interest rates unchanged at its January session, the National Bank of Poland (NBP) announced. The decision was in line with market expectations.
In its commentary on the session, the Council noted that latest data provided further evidence of reviving economic activity in the United States and (to a less extent) in the eurozone, as well as accelerating economic growth in the major emerging markets (especially China). However, the job situation in developed countries remained difficult and access to credit tight, it said. Meanwhile, domestic economic figures likewise signal an improvement in economic activity in Poland, and although the unemployment rate is creeping up, the relative stabilisation of employment in the enterprise sector seems to suggest that the negative trends on the labour market are bottoming out, the Council reckons. But lending to business continues to contract while lending to consumers remained subdued.
In December the consumer price index accelerated to 3.5% y-o-y, i.e. the top end of the central bank’s target range (2.5% y-o-y +/- 1 p.p.), due mainly to a lower reference base. However, in the months ahead inflation will slow, pulled down by a high reference base, weak demand, and the effects of earlier appreciation of the zloty and moderate rate of increase in labour costs.
All things considered, the Council reckons that the likelihood of inflation being above or below the central bank’s inflationary target in the medium term is comparable. At the same time, RPP believes that a combination of the anticipated global economic recovery and positive effects of earlier interest-rate cuts should help the economy return to its potential growth path. A major source of uncertainty are the effects of (the unwinding of) the stimulus measures implemented by foreign governments to protect economic growth.
Between November 2008 and June 2009 the Council slashed interest rates by a total of 250 basis points. As a result, the main reference rate currently stands at 3.5%, an all-time low.




In our view, one should not expect a change in interest rates in the months ahead. Among factors working against a tightening of monetary policy will be: a falling inflation rate, a modest pace of economic recovery, and the replacement of RPP members at the beginning of the year. A tightening cycle could start only in the second half of the year, when the positive trends in the economy become more entrenched and inflationary pressures reemerge. We forecast that at the end of 2010 the main reference rate will stand at 3.75%.

Paweł Sionko
Senior Economist
PMR Publications