Poland May Cut Rates Weeks Before Tight Election Despite Double-Digit Inflation

Piotr Skolimowski and Barbara Sladkowska
·3 min read

(Bloomberg) -- Poland’s central bank may look past inflation that’s lingering in the double digits to cut interest rates for the first time in three years, a decision that’s taken on a political dimension less than six weeks before an election.

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Policymakers in Warsaw are likely to lower the benchmark rate by a quarter percentage point to 6.5% Wednesday, according to 20 of 36 economists surveyed by Bloomberg. Governor Adam Glapinski said a cut would be warranted if inflation slid into the single digits — and he’s expected to go through with it even as consumers prices came in at 10.1% on an annual basis in August.

Central bankers across the region have begun to weigh the timing of cuts in the face of falling inflation, but election-season monetary policy in Poland has brought politics to the fore. Glapinski was reappointed last year by the ruling Law & Justice party, which is seeking an unprecedented third term in office. The opposition, which has targeted the governor over the country’s cost-of-living crisis and has called for his removal, voted against him.

Factors that favor a cut include rapidly decelerating inflation from its peak at 18.1% in February and an economy that contracted in the second quarter. It’s a sign that price pressures will continue to abate, Glapinski’s other condition for delivering a rate decrease. He’ll brief media at 3 p.m. Thursday.

“While double digit inflation is a valid argument to push against a cut at this meeting, looking objectively Governor Glapinski has a relatively strong case to start easing monetary policy gradually,” said Piotr Matys, senior analyst at InTouch Capital Markets. “There is a growing risk of a severe economic downturn.”

Risks to the inflation outlook include fiscal policy. In the months ahead of the Oct. 15 election, in which Law & Justice may struggle to secure a majority, the ruling party and the the main opposition Civic Platform have proposed a raft of social spending. The government last month raised its budget deficit projection for the next year — and is likely to allow for temporary tax cuts on food to expire in January.

Signals of an imminent rate cut have angered some members of the rate-setting Monetary Policy Council who were appointed by the opposition-controlled Senate. Policymaker Joanna Tyrowicz in July dismissed the single-digit condition as “blabber” and “false magic of round numbers.”

Yet Poland’s $680 billion economy is showing signs of weakening, with wages and industrial output registering below market expectations last month following the second-quarter contraction.

Investors in derivatives markets are pricing in more than two percentage points in easing over the next 12 months. A July projection showed inflation will only return to a tolerance range around the central bank’s target of 2.5% at the end of 2025.

Rafal Benecki, chief economist at ING Bank Slaski in Warsaw, expects the next central bank forecast to show a steeper decline in inflation rate. But he signaled that risks linger.

“Once we see signs of economic recovery and headline inflation bottoms out, we’re going to see arguments in the market for being more cautious with cuts,” he said.

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