Economic news:

• INTEREST RATES: Monetary Policy Council kept its previous stance and remained the key policy rate at 5.75%. Chairman of the National Bank of Poland, Adam Glapiński, made some boldly hawkish comments during his press conference on Thursday, as he highlighted several adverse risks to the inflation path. In particular, he had gained confidence from the MPC February seating that inflation is to rise in 2H25 due to regulatory pressures (first and foremost, regarding energy prices). His view aligned with the NBP’s most recent macroeconomic projections (released on Friday), showing inflation peak in 4Q25. However, as explained by NBP’s Head of Analyses and Research Department, the projection was constructed under quite specific assumptions; in particular, it was assumed that there would be no energy price freezing in 2H25 (while sources in the government indicate that further freezing is likely), and that energy tariffs would remain unchanged in 2026 (while there are strong tendencies in the international energy markets indicating lower prices next year). Altogether, we believe that NBP’s outlook is overly pessimistic, and that once uncertainty regarding energy prices gets resolved mid-year, MPC shall commence with monetary easing. 
• INFLATION: Due to the revision of weights in the consumer basket, the flash estimate of CPI inflation for January published a month ago was revised down by as much as 0.4 ppts to 4.9% y/y. Moreover, inflation in February stabilized at 4.9% y/y. The problem is still the "sticky" and elevated core inflation, which amounted to about 4.0% y/y in February. Lower inflation is of course a factor supporting the "dovish" attitude to monetary policy and a possible earlier start of interest rate cuts. This does not change the fact that we are entering 2025 with elevated inflation, although we will see its peak in the current cycle soon, in March, slightly above 5.0% y/y. At the end of 2025, inflation will be in the range of 3.0-3.5%. We wrote more about inflation in Poland in the commentary after the data release. 
• BUDGET: Last week’s fiscal-related news were all about defense spending. President Andrzej Duda has drafted an Amendment to the Constitution, under which yearly defense expenses shall not fall short of GDP 4%. PM Donald Tusk made a remark during a Parliament session that in the years to come it will be necessary to allocate GDP 5% to military spending. Katarzyna Pełczyńska-Nałęcz, Minister of Funds and Regional Policy informed that PLN 30 bn will be transferred from Poland’s share of NGEU to a special Safety and Deterrence Fund. 
• MoF: Ministry of Finance has revised its forecast of 2025 inflation from 5.0% to 4.5% y/y. This is in line with Pekao’s macroeconomic outlook. 
• LABOUR MARKET: Unemployment rate rose unexpectedly to 5.5% in February from 5.4% in the previous month. It made February the first month in almost four years with a y/y unemployment increase. However, we believe that this is rather a minor data glitch than a structural sign of tensions in the labour market. 
• DIGITAL SERVICE TAX: Ministry of Finance debunked signals coming from the Ministry of Digitalisation and claimed that there is no intent to proceed with any DSA legislation. The MoF reminded that it has sole authority to pursue any changes in the tax code. 

Hawkish comments from the NBP governor 

Adam Glapiński had virtually no good news for those hoping for a dovish turn at last week’s press conference. As for now, in his view, there is no basis for monetary easing. Inflation has risen too much, wage growth is too high, fiscal policy is too expansive, and the geopolitical environment is unfavorable. To add insult to injury, the NBP's macroeconomic projections offer little hope that these conditions will improve in the coming months. Average annual inflation this year, according to the bank's analysts, will be higher than last year, and only in 2027 can the middle of the inflation target range be expected to be reached. All these forecasts have been formulated under assumption that the current level of interest rates is maintained indefinitely. 

Moreover, the NBP Chair repeatedly returned to enumerating risks for his economic outlook. Although all of them are symmetrical in nature, i.e. they can both raise inflation and lower it, Mr Glapiński sees them asymmetrically, so as potential triggers of higher inflation. So, in line with his narrative, it's better to stay cautious and keep interest rates unchanged. The following list enumerates the uncertainty factors mentioned by Mr Glapiński (in the order he discussed them) alongside with when they may be expected to be resolved. 

• Wage growth rate: Wage growth last year – as the Chairman aptly noted – reached a 20-year high (7.5% y/y in real terms). However, it peaked in Q1 2024 and in the following quarters it slowly – but continuously – decelerated. In January, it already fell below 4% in real terms (9.2% in nominal terms), and there are many indications that it will continue to converge towards 3% y/y in real terms. There will be no consumption boom this year, and by the middle of the year, the remaining uncertainty on the matter will have dissipated. Albeit economic growth is indeed set to accelerate, it is mainly due to surge in investment. One shall note that the impact of investment on inflation is far from trivial to estimate.    
• Geopolitics: Trade wars, the war in Ukraine, the situation in China – the scale of uncertainty is indeed large. However, the risks seem to lean toward lower inflation rather than CPI acceleration. The trade wars most probably will limit economic growth in both Europe and the world; and China does not look like it is preparing for a new big leap (markets do not believe in the CPC’s fiscal stimulus plans). 
• Fiscal policy: the NBP Chairman sees no signals of fiscal tightening in Poland (i.e. deficit reduction). Such indicators are indeed scarce; yet, hardly could Poland’s fiscal policy be described as expansionary. The budget is much less generous to households this year than it was last year, when the government raised budget wages by 30% and uprated social transfers (500+ -> 800+). In April, however, a new Multiannual National Financial Plan (previously known as Convergence Program) will be published, and it shall comprise more detailed roadmap for fiscal consolidation.  
• Energy prices: They will remain at the current level until July, when the capacity fee (PLN 11.4/month per household) will be added back to the electricity bills. The final stage of energy price unfreezing is scheduled for October (the first stage occurred in July 2024). By the end of April, however, electricity distributing companies will submit their new price tariff proposals, so that much of uncertainty shall be resolved by then. Furthermore, these tariffs will be in effect for only one quarter, if at all – since an extension of the energy price freeze until the end of the year seems quite likely. The NBP's inflation projection, however, assumes very high price increases:10-15% increase in gas and electricity bills, which will add 0.7pp to the CPI inflation. In any case, we expect the uncertainty regarding electricity prices to be resolved by April/May, which will probably translate into a downward revision of the July inflation projection for 2025. In the following year (2026), energy prices will probably be no higher than the current ones (frozen!) – at least this is what trading companies and the energy market suggest. All uncertainty will be gone in December. 
• Sentiment in the Eurozone: The Polish economy is unable to sustainably grow at a rate above 3% y/y without support from our major trading partners. So far, there has been no such support, but the first signs of improvement in the eurozone are already visible, not only due to looser monetary policy, but also plans for fiscal loosening. This is in fact a factor potentially driving up inflation in Poland, but rather on a limited scale and only in 2026. 

To sum up: the NBP governor is not ready to discuss rate cuts at the moment. He also does not believe that there will be space for such a discussion in the coming months (or at all this year). The Chairman’s narrative does not support policy rate cuts in the second half of the year; yet, it does not make it totally implausible. There have been several narrative turns in Mr Glapiński’s communications (most recently in December, earlier in September), and we see non-negligible likelihood that in the coming months he will change his attitude again. By July, some of the uncertainty he spoke about at yesterday's press conference (on energy prices or wage growth) will have disappeared. Consequently, the central bank’s economic outlook shall lean towards lower inflation path. Therefore, we maintain our forecast that interest rates will fall by 100 bp this year. However, monetary easing will commence in September and not in July, as previously expected. 

National Bank of Poland policy rate market expectations (cumulative change, bp) 

Source: Refinitiv 

Financial market update

Friday's revision of inflation in Poland was due to an update of the weights in the consumption basket, so it should not affect the dynamics of inflationary processes and only the price level. However, it happened a day after the NBP president's hawkish conference, symbolically undermining one of his important arguments (that inflation is not falling and there are no forecasts of its decline). The markets perceived this fact as a dovish signal. Yields on Polish government bonds, after a week of consolidation, dropped noticeably, by 7bp on the short end and 5bp on the long end. Bets on rate cuts in the second half of the year, meanwhile, got wind of the move (the market is now pricing the first full cut in July). The zloty, in spite of the data, initially strengthened, but in the second half of the day returned to its starting point of 4.185 on EUR/PLN and just under 3.85 on USD/PLN.  

This week we will learn a lot of data from the Polish economy for February, and according to our forecasts they will be part of a disinflationary trend (further deceleration of wages) rather than show demand pressure, so we see more chances for a drop in bond yields and a slight weakening of the zloty than a move in the opposite direction. However, geopolitics may be more important for markets than local data.