Polish central bank seen cutting key rate by 25 bps on Wednesday: Reuters poll

The National Bank of Poland is widely expected to cut its key interest rate by 25 basis points to 4.75% on Wednesday, with a Reuters poll indicating 26 of 30 analysts foresee the move as August inflation fell to 2.8%, within the NBP's target range. However, a notable minority of analysts and market observers highlight significant fiscal risks, including higher deficit forecasts and substantial government spending, alongside uncertainty over future electricity prices as household caps expire in October, suggesting a potential pause in easing despite the prevailing expectation.

Analysis

A strong consensus among analysts points to the National Bank of Poland (NBP) delivering a 25 basis point rate cut to 4.75%, supported by the latest flash inflation reading of 2.8% for August, which places price growth firmly within the central bank's target band of 2.5% +/- 1 percentage point. This follows a 25 bps cut in July and a 50 bps reduction in May, signaling a recent shift towards monetary easing despite cautious commentary from NBP Governor Adam Glapinski. However, the decision is finely balanced due to significant countervailing pressures. Analysts highlight increased fiscal risks, evidenced by Poland's raised 2025 deficit forecast and high government spending, as a primary reason the NBP might pause its easing cycle. Furthermore, uncertainty surrounding the expiration of household electricity price caps in October, a risk factor explicitly noted by the Governor, presents a material threat to the near-term inflation outlook. This divergence between favorable current inflation data and forward-looking fiscal and energy price risks makes the upcoming decision a 'near toss-up' according to some observers, suggesting that while a cut is the base case, a hold remains a distinct possibility.

Key Decisions for Investors

• Investors should position for the base case scenario of a 25 basis point rate cut, but recognize that this outcome is largely priced into Polish assets, shifting the market's focus to the NBP's forward guidance.
• Given the material risks from fiscal policy and future energy prices, it is crucial to scrutinize the central bank's accompanying statement for its assessment of these factors, as a hawkish tone or a pause could trigger volatility in Polish bonds and the zloty.
• For those with a medium-term outlook, while a gradual easing cycle is anticipated, weigh the potential for further cuts against the risk that persistent fiscal deficits and future inflation shocks could force the NBP to adopt a more restrictive stance than currently expected.