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The Polish National Bank surprised the markets on Wednesday with a sharp cut in its benchmark interest rate, reversing monetary policy ahead of other central banks and ahead of a hotly contested national election.
The interest rate setters cut borrowing costs to 6 percent from 6.75 percent. Analysts had expected the cut ahead of next month’s vote, but most expected 0.25 percentage points, because Polish inflation remains in double digits and well above the EU average.
Some economists have warned that the central bank, led by its chief Adam Glabinski, has been unduely influenced by the goals of the ruling Law and Justice party, which is seeking a third consecutive term in office after parliamentary elections on Oct. 15.
However, the size of Wednesday’s cut was “shocking”, said Bartosz Sawicki, market analyst at brokerage Konotoxia, because it was also outside the scope of Mr Glabinski’s own guidance on gradual monetary easing once inflation drops below 10 per cent. The Polish zloty fell nearly 2 percent against the euro after the interest rate cut was announced.
Although Polish inflation has fallen sharply in recent months, consumer prices rose 10.1 per cent in August. Economists are also concerned that core price pressures – which exclude changes in volatile items such as food and energy and are seen as a better measure of core inflation – remain elevated.
The Czech and other central banks in the region are also likely to cut interest rates in the fourth quarter, but in a “more cautious way”, Sawicki predicted.
Jakub Borowski, chief Polish economist at Credit Agricole, said that interest rate setters in Poland “have chosen extremes in monetary policy”. “In our opinion, there was no sharp deterioration in the economic situation in Poland in recent months, and therefore there was no justification for such a strong one-step rate cut.”
Glabinski, 73, was appointed to the bank’s monetary policy board in 2010 and has a long personal relationship with party leader Jaroslav Kaczynski. It has the support of a majority of the members of the Council.
Lower interest rates could help Polish companies that have been struggling to cover their borrowing costs since the fall of 2021, when the Polish Bank was among the first central banks to raise interest rates.
In a statement following the rate-setters’ decision, the central bank highlighted the weakness of the Polish economy in the second quarter, driven by lower consumption, as well as lower producer prices which also increases the likelihood that inflation will continue to decline in the 2019 and upcoming quarters.
Poland “exceeded market expectations by six months,” Erste Bank said in a research note. After this significant cut, Erste said it expects no further changes in Polish interest rates until the end of the year, with further cuts likely in the first quarter of 2024.