Poland’s central bank took the financial world by surprise on Wednesday, slashing its main interest rate by 75 basis points to 6.00%. This decision was made ahead of the October elections and caused the zloty currency to plummet against the euro.
A recent Reuters poll of analysts had predicted a 25-bps cut, but the scale of the easing delivered left both markets and economists stunned. Following the announcement, the zloty plunged 1.5% to its weakest level since May, and banking stocks dropped over 5%.
The National Bank of Poland (NBP) justified its decision by noting that it expects inflation to return to its target faster than originally anticipated.
“In the Council’s assessment, recently incoming data point to a weaker demand pressure than previously expected, which will contribute to a faster return of inflation to the NBP inflation target,” noted the NBP in a statement.
The bank added that the interest rate adjustment would be “conducive to meeting the NBP inflation target in the medium term”.
NBP Governor Adam Glapinski had previously hinted that a rate cut could come in September if inflation fell to single digits.
While inflation continued to fall in August, it fell slightly short of this target, coming in at 10.1%, according to a flash estimate.
Economists, however, were quick to point out the inflationary risks of such a drastic shift in monetary policy.
Piotr Bielski, the Director of the Economic Analysis Department of Santander Bank Polska, argued that it is too early for a rate cut, especially such an aggressive one since the prospects of a slowdown in inflation are still distant.
“I think that the market will be pricing in the risk of inflation becoming entrenched and in general, this will make it difficult for inflation to return to the target.”
J.P. Morgan analysts added in a note that central banks should be cautious, given the significant uncertainty about inflation prospects in this cycle, not just in Poland but globally.
“If cutting rates at this point was debatable, cutting in size is even more so,” they wrote.
Wojciech Paczos, a research economist at Cardiff University, suggested that the decision could have been influenced by political considerations, with parliamentary elections scheduled for Oct. 15.
“I assess that there is a risk of a trend reversal and new inflation increases, as well as a risk of reversing this decision after the elections and returning to interest rate hikes,” he wrote on X, formerly known as Twitter. “I estimate that this is a hundred percent political decision, not dictated by economic logic.”
Glapinski, who has strong links to the ruling Law and Justice (PiS) party, is considered an ally of its leader Jaroslaw Kaczynski.
The government denied any interference, “The Monetary Policy Council makes decisions independently of the government. The composition of the council is diverse and is elected by various state institutions. The government has no say in council decisions. Thus, the allegations made by critics are unfounded,” the government spokesman said.
USD/PLN Long (Buy)
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