Poland: NBP ends easing cycle with higher-than-expected 1.50% cut to reference rate
March 4, 2015
The National Bank of Poland (NBP) slashed its reference rate by 50 basis points to a record low of 1.50% at its 3-4 March monetary policy meeting. The cut overshot market expectations of a 25-basis-point reduction. In addition, the Bank reduced the Lombard rate to 2.50% from 3.00%. The NBP also cut the deposit rate to 0.50% from 1.00% and reduced the rediscount rate to 1.75% from 2.25%. The decisions were backed by a solid majority of board members and marked the end of the Central Banks’ monetary easing cycle.
In its accompanying statement, the NBP mentioned that the global economy continues to grow moderately, although the situation varies across countries and regions. According to the Bank, the U.S. economy is continuing to recover at a solid pace and the outlook appears to be positive. In contrast, economic activity in the Euro area remains weak despite the slight acceleration in Q4 of last year. Growth in large emerging market economies, such as China and Russia, is also sluggish compared to previous years. On the domestic front, the NBP commented that, “the pace of economic growth in 2014 Q4 slowed down slightly, but stayed close to 3%. GDP growth remained stable due to further rise in consumer demand and still high, despite some deceleration, investment growth.”
Regarding inflation, the Bank stated that the decline in prices for oil and other commodities has been adding to a deceleration in price growth in many countries and has driven deepening deflation in a great number of European economies. Consumer prices in Poland declined 1.3% annually in January, hitting an all-time low and moving further away from the Bank’s medium term inflation target of 2.5% plus/minus 1.0 percentage points. As a result of these developments, the Bank decided to revise its CPI growth forecasts downward for this year and the next. The NBP now foresees that annual CPI variation will be between -1.0% and 0.0% in 2015 (compared to 0.4%–1.7% in the November 2014 projection), and between -0.1% and 1.8% in 2016 (as compared to 0.6%–2.3%).
Although some members of the Board commented that the factors behind the sharp fall in Polish consumer prices were beyond the Central Bank’s control, they also acknowledged that the risk of deflation was too high to not take any actions to try to mitigate it. Moreover, the continuing drop in oil prices has led many major Central Banks to cut rates, thus pushing the NBP to ease its own monetary policy in order to reduce the interest rate disparity between Poland and the rest of the world.
After the results of the meeting were released, the Polish currency weakened notably, but then recovered somewhat after the Bank said the easing cycle was over. The zloty closed the day at 3.75 against the U.S. dollar—the highest value since 28 January. As many analysts suggested, the recent weakening of the zloty is most likely to be temporary as Polish economic prospects remain quite favorable. In fact, the NBP revised its GDP forecasts during its March meeting, raising its 2015 growth projections from a range between 2.0% and 3.7% in November 2014 to a range between 2.7% and 4.2%. For 2016, the Bank upgraded its growth forecasts from 1.9%–4.2% to 2.2%–4.4%.
Finally, the Bank commented that, “taking into account prolonging deflation and a significant increase in the risk of inflation remaining below the target in the medium term, as indicated by the March projection, the Council decided to decrease NBP interest rates. Decision to lower the interest rates at the current meeting concludes the monetary easing cycle.”
Author: Cecilia Simkievich, Economist