Polish central bank likely to lower rates by Q3, lowers inflation outlook for 2016, 2017

Poland’s central bank, during its meeting on Friday, kept its policy unchanged and hinted a likely reduction in rate if there is excessive capital inflow from euro area. The central bank cut its inflation forecasts as expected. The Polish central bank cut its inflation outlook for 2016 to -0.35% as compared with the earlier projection of 1.1%.

Meanwhile, projection for 2017 inflation rate was lowered to 1.25% from the earlier estimate of 1.45%. Central banks in CEE region have been lowering their inflation forecasts quarter by quarter and always being overrun by developments. This is not expected to be the last cut in forecast.

The current governor Marek Belka has not ruled out rate cuts; however, he will be replaced soon. It is therefore little early to pinpoint the timing of first rate cut. However, it expected that the central bank will lower by Q3. Lowering of the interest rate is not expected to depreciate the zloty from the current levels that have overshot due to political risk perception. EUR-PLN is expected to return to 4.35 in the medium-term.