Will the Monetary Policy Council cut rates again? The prediction of PKO BP economists

PKO BP analysts predict the Monetary Policy Council will cut rates by 25 bps this week, with the risk of a move of 50 bps and 25 bps in November.

– Despite a strong recovery in consumption, GDP growth in real terms will not exceed potential growth at the end of next year, at least until the third quarter. The output gap will therefore remain negative, i.e. widen, until the third quarter of 2024, and this will help to reduce fundamental inflationary pressures. We forecast CPI and core inflation to decline significantly in the coming quarters, PKO BP chief economist Piotr Bujak said at a press conference.

As he explained, this process will play out at its largest scale until spring – that is, until April/May in the case of core inflation, and March/April in the case of CPI inflation. – We expect the CPI to stabilize later this year. Given this behavior of the economy and inflation processes, we believe there is room for further adjustment in NBP nominal interest rates, he added.

– We assume that real interest rates will remain relatively stable at around 0% or slightly above. Nominal interest rates are reduced to 5.5%. by the end of this year and 4.5 percent by the end of next year, and effectively by mid-2024, the period when we will see the greatest progress in the disinflation process. Later, we believe monetary policy will move into a wait-and-see mode, Bujak said.

Interest rates. The MPC decision will be announced on Wednesday

The bank’s analysts predict that due to the strong market reaction in September after a high interest rate cut of 75 basis points to 6 percent, a sharp weakening of the zloty, a steepening of the domestic yield curve and a larger decline in interest rates on the the short end, further steps in monetary policy will be more cautious.

“Ongoing disinflation at the start of 2024 will allow the Monetary Policy Council to cut rates by a further 100 basis points in the first half of next year. Compared to the previous edition of the Quarterly, our forecast for 2023 is lower by 100 basis points (mainly due to the more dynamic start of the reduction cycle) and for 2024 by 50 basis points. A rapid decline in nominal interest rates combined with a slowdown in disinflation in 2024 will mean that real ex ante interest rates could fall in the near future. Therefore, in our opinion, the Monetary Policy Council must remain cautious in its decisions and be very sensitive to the situation on the financial markets and in the external environment of the economy,” we read in the press release.

The most important uncertainty factors for interest rate forecasting are: the shape of the Monetary Policy Council reaction function; the pace of disinflation and regulatory solutions affecting price changes; the persistence of core inflation in Poland; restrictiveness of Fed and ECB policies; developments in the zloty exchange rate, as well as shocks in the energy commodity market.

Source: Do Rzeczy

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