The monetary authorities, i.e. the National Bank of Poland and the Monetary Policy Council, must act cautiously. The size of the interest rate cuts should be small at once, and the central bank should look at the effects of its actions, said Piotr Bujak, chief economist at PKO BP bank, in an interview with DoRzeczy.pl.
DoRzeczy.pl: PKO BP analysts predict that 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. How do you evaluate the possible decision?
Piotr Bujak: The main factor pointing to a reduction in NBP interest rates is a marked decline in inflation. From a peak of 18% in February this year, CPI inflation fell to just over 8% in September. Forecasts indicate that this rate will be between 6 and 7 percent by the end of this year, and that it could fall to 4 percent at the beginning of the first and second quarters of next year, i.e. the predicted upper limit of allowable deviations from the point goal, which is 2.5 percent
So the predictions are promising?
Medium-term forecasts indicate that reducing inflation may be more difficult in the period after the first and second quarters of next year, with many forecasts calling for cuts in nominal interest rates to around 4% over the next two years possible to permanently reduce inflation within the limits of permitted deviations from the target. It is worth pointing out that with such an inflation scenario and the scenario of nominal NBP interest rates, real interest rates in Poland will remain above zero.
What does keeping interest rates above zero mean?
If this is the case in this case, it would provide an opportunity to permanently achieve the inflation target over the medium term. The last time we had a sustainable interest rate above zero in Poland was in 2016. Poland had negative interest rates in all subsequent years. This makes the plan to reduce inflation coherent with nominal interest rates. Moreover, a key argument for MPC members voting in favor of interest rate cuts is the weakness of domestic demand, especially consumer demand. Demand is falling and the last quarter of this year was again a quarter with negative consumption dynamics. The output gap is also negative, which helps limit inflationary pressures and lowers inflation, which is a key argument for lowering interest rates.
Do we have risk factors?
Yes. Most of these are vegetative in nature and can increase inflation. Therefore, the monetary authorities, i.e. the National Bank of Poland and the Monetary Policy Council, must act cautiously. The magnitude of interest rate cuts should be small at any given time, and the central bank should look at the effects of its actions, especially whether negative factors emerge.
Source: Do Rzeczy

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