NBC minutes gently dovish, keep alive the possibility of interest rate cuts

Minutes of an April 6th meeting of the National Bank of Poland released on Thursday showed that the fear surrounding the replacement of the NBP leaders had been exaggerated. The conservative tenor of the monetary policy of the National Bank of Poland had been maintained even after the replacement of nearly all the MPC members.

 The last minutes displayed a weak support for additional rate cuts when telling that “certain Council members did not rule out a necessity for lowering the interest rates should indications of negative developments associated with deflationary processes occur, even though they assessed their probability as low”.

Although Poland’s inflation is still well in negative territory (below the central bank's target), the interpretation remains almost the same as in late 2015, i.e., deflation is seen as temporary, and triggered by external effects (low commodity prices in particular). Under these conditions, the MPC does not feel the need to change interest rates and prefers rate stability which, the NBP leaders believe, will also contribute towards financial stability.

Nevertheless, a shift noticed in the MPC’s communication compared to late 2015 and early 2016 is that majority of Polish central bankers did not rule out the possibility of interest rate cuts in the event of an economic slowdown and deepening deflation. Hence, should hard cyclical data deteriorate significantly during 2016, rate cuts will be an option.

Some economists now expect the recently revamped monetary policy board to embark on rate cutting later this year. For now, NBP rate-setters are evidently not going to run the risk of a rate cut triggering an outflow of portfolio capital from the country (and selling of the zloty and government bonds).

"Despite this slightly dovish conclusion of the minutes of April’s NBP meeting, we are still betting on the stability of the official interest rates in Poland – inter alia because the NBP leaders are explicitly mentioning the uncertainty of the outlook and external risks such as the BREXIT (June 23rd)." said KBC Market Research.