Polish Central Banker Signals End to Rate Cuts, Warns of Geopolitical Risks

The National Bank of Poland (NBP) opted to lower interest rates by 0.25 percentage points in March, a move that has sparked debate about the future trajectory of monetary policy. The benchmark interest rate now stands at 3.75% annually, with the lombard rate at 4.25%, the deposit rate at 3.25%, the rediscount rate for bills at 3.80%, and the discount rate for bills at 3.85%. This decision, made against a backdrop of escalating geopolitical tensions – particularly the conflict in the Middle East – reflects a cautious approach from the Monetary Policy Council (MPC), according to member Marcin Zarzecki.

Zarzecki, speaking with Interia Biznes, emphasized the importance of a “wait-and-witness” approach, closely monitoring economic data and external factors before making further adjustments. He acknowledged the possibility that the current easing cycle could come to an end, stating, “I do not exclude this scenario.” The MPC’s guiding principle, he explained, is to react to incoming data, a rule that is particularly crucial given the simultaneous emergence of multiple external shocks.

Navigating Geopolitical Uncertainty

The potential for further escalation in the Middle East is a key concern. Zarzecki highlighted the require to accurately predict the conflict’s development and its transmission channels to the Polish economy. The NBP utilizes stochastic models with fan charts to assess risks, recognizing the inherent uncertainty in the global landscape. The bank is also considering the impact of fluctuating energy prices, which have risen in recent months, and lower agricultural commodity prices.

While some market forecasts suggest potential interest rate hikes of 50-75 basis points within the year, Zarzecki believes such predictions are premature. He pointed to recent market activity, where contracts indicated expectations of further rate cuts, and the consistency of the March projection with available data. The NBP’s decision was based on a comprehensive analysis, achieving consensus among council members.

Assessing Inflationary Pressures

Concerns about rising energy prices haven’t overridden the rate cut decision, but they remain a factor. The MPC discussed the risks associated with a potential conflict in Iran, but lacked sufficient hard data to quantify its impact on CPI inflation and GDP dynamics at the time of the decision. Zarzecki stressed that the NBP, as an expert body, responds to established shocks rather than reacting speculatively to market fluctuations.

The NBP projects inflation to fall within a range of 1.6-2.9% in 2026, 1.1-3.7% in 2027, and 0.9-4.0% in 2028, with GDP growth expected to be 3.1-4.7% in 2026, 2.0-3.8% in 2027, and 1.8-4.1% in 2028. These projections informed the decision to lower rates.

Transmission Channels of External Shocks

Zarzecki identified four primary channels through which external shocks could impact the Polish economy: price increases (particularly for oil and gas), currency depreciation, reduced foreign demand, and potential shifts in inflation expectations. He noted that a $20 increase in the price of oil could add 0.2-0.4 percentage points to CPI, while a 5-12% weakening of the złoty could add another 0.3-0.4 percentage points through import prices. A combination of these factors, without offsetting fiscal and monetary policy responses, could lead to stagflation – a scenario of higher inflation and stagnant or declining GDP growth.

However, Zarzecki expressed optimism that strong economic growth, supported by the absorption of funds from the Recovery and Resilience Plan (KPO), would help mitigate these shocks. He emphasized that the rate cut was not a hasty decision, but one based on solid data, modeling, and verifiable indicators.

The SAFE 0% Debate and Reserve Management

The discussion also touched upon the proposed “SAFE 0%” program – a European Union initiative offering preferential loans for defense spending – and the potential use of NBP’s substantial foreign exchange reserves. Zarzecki acknowledged the debate surrounding the program, highlighting the need for a careful assessment of its financial implications. Poland holds over 1 trillion złoty in foreign exchange reserves, a figure that exceeds standard adequacy metrics set by the International Monetary Fund (IMF). The appointment of Marcin Zarzecki to the MPC comes at a critical juncture as these issues are debated.

Zarzecki suggested that a portion of these reserves could be utilized to finance defense spending, potentially avoiding the need to rely solely on the SAFE 0% program and its associated debt. He cautioned, however, that any such decision must be made with careful consideration of its impact on financial stability and the NBP’s credibility. He also pointed out that unrealized gains from the valuation of gold holdings are accounted for differently than operational losses, and cannot be directly used to cover past losses.

Procedural Concerns and Future Outlook

Zarzecki expressed concern about the timing of the SAFE 0% proposal, noting that it emerged shortly before the planned signing of the relevant legislation, leaving limited time for thorough discussion and analysis. He emphasized the importance of considering alternative financing options and conducting a comprehensive cost-benefit analysis.

Looking ahead, Zarzecki reiterated the MPC’s commitment to a data-dependent approach, adjusting monetary policy based on incoming macroeconomic data. He reassured the public that there would be no “panic” reactions or abrupt policy reversals without sufficient justification. The NBP will continue to monitor inflation, GDP growth, and external conditions to calibrate its policy appropriately. The agency Fitch recently maintained a negative outlook for Poland, citing concerns about the country’s fiscal deficit and debt levels. Marcin Zarzecki’s background, including his work with Karol Nawrocki, has also drawn attention.

The NBP’s next steps will be closely watched by markets and businesses alike, as Poland navigates a complex economic environment marked by geopolitical uncertainty and evolving inflationary pressures. The central bank’s ability to maintain credibility and respond effectively to changing conditions will be crucial for ensuring sustainable economic growth and price stability.