Polish Rate Cut on the Horizon: Navigating the MPC's May Decision Amid Cooling Inflation

The National Bank of Poland (NBP) has kept its benchmark reference rate steady at 5.75% since October 2023, a period of prolonged stability aimed at balancing inflation pressures with economic fragility. However, recent signals from policymakers, including MPC member Kinga Maslowska’s comments to Bloomberg about a potential 25-basis-point (bps) cut in May, suggest the tide may finally be turning toward easing. This pivot, rooted in evolving inflation dynamics and shifting economic data, presents both opportunities and risks for investors. Let’s dissect the factors driving this potential shift and its implications.

Current Rate Stance and Inflation Dynamics

The NBP’s April decision to hold rates at 5.75% underscored its cautious approach to disinflation. While March 2025 inflation stood at 4.9%—still above the 1.5-3.5% target—the central bank cited “disinflationary trends” in its projections. These forecasts anticipate inflation easing to 4.1-5.7% in 2025, 2.0-4.8% in 2026, and 1.1-3.9% in 2027, suggesting a gradual return to target. Crucially, the NBP highlighted moderating wage growth and stable energy prices as key drivers of this outlook.

This historical trajectory reveals the NBP’s aggressive tightening cycle, which peaked at 5.75% in late 2023. A May cut would mark the first easing step in over 18 months, signaling a turning point.

Economic Data and Policy Considerations

The NBP’s pause has been underpinned by mixed economic signals. First-quarter GDP growth fell short of expectations, reflecting weak domestic demand. However, the labor market remains a bright spot: unemployment dipped to 2.9% in Q1, with employment growth holding firm despite a slight year-on-year dip in enterprise sector jobs. Wage growth, while still elevated at 8.2% year-on-year, has slowed from double-digit peaks, aligning with the NBP’s hopes of curbing second-round inflation effects.

This juxtaposition of weak GDP and resilient labor markets creates a dilemma for policymakers. While the former argues for stimulus, the latter demands caution to avoid reigniting inflation.

Market Expectations and Analyst Projections

Analysts are now pricing in a 25- to 100-bps rate cut by year-end, with the terminal rate projected at 4.25% by 2026. The May meeting’s potential 25-bps reduction would likely be the first in a gradual easing cycle, contingent on data.

These expectations reflect a shift toward confidence in disinflation, though risks persist. Persistent core inflation or a rebound in energy prices could delay cuts, while a sharper-than-expected slowdown might accelerate them.

Investment Implications

For investors, the NBP’s potential pivot opens strategic avenues:
1. Fixed Income: Polish government bonds (e.g., 10Y PLN-denominated notes) may rally as rate cuts reduce yields. The PLN bond yield curve is expected to flatten further, favoring short-term maturities.
2. Equities: Cyclical sectors like consumer discretionary and construction could benefit from lower rates, though earnings growth remains constrained by tepid GDP.
3. Currency: The zloty, already under pressure from rate differentials with the euro, may weaken slightly if cuts materialize, aiding exporters but raising import costs.

Conclusion

The NBP’s potential May rate cut underscores a pivotal shift in its policy stance, driven by cooling inflation and a fragile recovery. With inflation projected to trend downward and wage growth stabilizing, the path to easing appears increasingly plausible. However, investors must remain vigilant: a sudden inflation rebound or geopolitical shocks—such as energy price spikes—could disrupt this trajectory.

The NBP’s communication has consistently emphasized a data-dependent approach, meaning each monthly meeting will hinge on GDP, employment, and inflation metrics. For now, the market’s pricing of a terminal rate of 4.25% by 2026 reflects cautious optimism. Yet, as history reminds us, central banks often surprise—whether through delayed action or unanticipated boldness. Investors would be wise to stay agile, monitoring the NBP’s next moves closely.

The Polish economy stands at a crossroads, and the MPC’s decisions in the coming months will shape not only its financial markets but also its broader economic health for years to come.