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Tuesday, June 25, 2024

interest rates. Some MPC members warn against “too slow” reduction of inflation

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In May, some members of the Monetary Policy Council reiterated their opinion that the current scale of interest rate increases is insufficient to bring inflation back to the target, according to the minutes of the MPC meeting held on May 9-10. The majority of the Council judged that the recently observed zloty strengthening was conducive to disinflation.

Certain members of the Council expressed the opinion that in view of the continued high price growth and heightened inflation expectations, the hitherto scale of interest rate increases NBP is insufficient to ensure return inflation to the medium-term target and lowering inflation expectations to levels consistent with the medium-term inflation target. In the opinion of those members of the Council, the process of disinflation expected in the light of the forecasts, and in particular the decline in core inflation, will proceed too slowly.

A gradual return to the inflation target

In turn, the majority of the Council members assessed that the economic downturn in the external environment of the Polish economy, coupled with falling commodity prices, would continue to have a limiting impact on global inflation, which would also contribute to lower price growth in Poland.

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“The decline in domestic inflation will be driven by the weakening of the growth rate GDP, including consumption, taking place in conditions of a significant slowdown in credit growth. As a result, the majority of the Council members assessed that the previously implemented strong tightening of the NBP’s monetary policy would lead to a decline in inflation in Poland towards the NBP’s inflation target.

At the same time, due to the scale and durability of the impact of previous shocks, which remain beyond the influence of the domestic monetary policy, inflation will return to the NBP inflation target gradually. inflation to the target may entail significant costs for macroeconomic and financial stability.

Council members upheld their assessment that faster inflation reduction would be supported by the strengthening of the zloty, which, in the Council’s assessment, would be consistent with the fundamentals of the Polish economy. At the same time, the majority of the Council members assessed that the recent strengthening was conducive to the disinflation process zloty exchange rate.

The majority of the Council members judged that, taking into account the above conditions, and in particular the expected gradual decline in inflation, the weakening of the domestic economic climate, including the decline in consumer demand, lowering inflation expectations, low growth of monetary aggregates, including low lending growth, as well as declining inflationary pressure abroad combined with risks for the global economic situation, and taking into account the previously implemented strong monetary tightening, it is now justified to keep the NBP interest rates unchanged.

Council members pointed out that further decisions of the Council would depend on the incoming information on the outlook for inflation and economic activity.

Many uncertainty factors

While assessing the outlook for inflation, the majority of the Council members were of the opinion that consumer price growth would continue to significantly decline, continuing the process of disinflation that had begun.

Some members of the Council expressed the opinion that the decline in inflation might be somewhat slower than the path outlined in the March projection. In this context, those members highlighted the many persisting uncertainties. At the same time, the majority of the Council members assessed that the outlook for inflation returning to the target over the projection horizon had not changed. However, certain members of the Council assessed that by the end of 2025 inflation would not fall to the level of the NBP inflation target.

Some MPC members assessed that the credit channel was effective, despite a certain increase in newly granted housing loans in the recent period, which, however, to a large extent resulted from the easing of supervisory recommendations regarding the conditions of creditworthiness assessment.

In May, the MPC kept interest rates unchanged for the eighth month in a row, including the reference rate at 6.75 percent.

Main photo source: Shutterstock

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