Polish Rate Cuts Offer Fixed-Income Opportunity Amid Inflation Divergences

The National Bank of Poland's (NBP) May 2025 decision to cut its reference rate by 50 basis points (bps) to 5.25%—the first easing since October 2023—marked a pivotal shift in monetary policy. Yet, behind this move lies a critical debate: will Governor Adam Glapiński's cautious approach yield to the dovish signals from fellow MPC member Magdalena Litwiniuk, or will internal divisions limit the pace of easing? For fixed-income investors, the answer hinges on three converging catalysts: revised inflation projections, energy price caps, and a real rate surge. These factors suggest a compelling opportunity in long-duration Polish government bonds, even as risks loom from policy uncertainty.

Inflation Dynamics: A Clear Downward Trend

Poland's inflation has been on a steady decline, falling to 4.1% year-on-year in May 2025, an 11-month low. This reflects a confluence of factors: energy prices, particularly natural gas, have dropped by ~15% year-on-year due to expiring price caps and a weaker U.S. dollar. Core inflation metrics, such as the 15% trimmed mean (3.9% YoY) and inflation excluding volatile items (2.7% YoY), signal entrenched disinflation. The NBP now anticipates inflation will approach its 2.5% target by mid-2026—**six months earlier than projected in March meiden. This timeline could tighten further as energy comparisons ease in the second half of 2025, when the removal of the “energy shield” in mid-2024 creates a high statistical base.

The MPC's Divergent Signals: Caution vs. Dovish Resolve

Governor Glapiński has emphasized the need for patience, citing risks from wage growth and labor market tightness. Yet, his stance contrasts sharply with Litwiniuk's calls for faster easing. Her argument—that Poland's real policy rate (now ~2.75%) has surged to restrictive levels—resonates with data: nominal GDP growth has slowed to 3.2% in Q1 2025, while core inflation is decelerating. If the MPC splits, the outcome could still favor cuts, as a majority of members now see disinflation as entrenched.

Analysts at ING have already revised their forecasts, predicting three additional 25-bps cuts by year-end, bringing the reference rate to 4.5% by December. This would mark total easing of 100 bps in 2025, exceeding the market's current pricing of 75 bps. The catalyst? A potential June pause followed by aggressive action in Q3–Q4, as inflation data continues to surprise on the downside.

The Case for Long-Duration Bonds

For bond investors, the calculus is clear: long-duration Polish government bonds (PLGBs) offer asymmetric upside. Yields on 10-year PLGBs have fallen to 4.5% from 5.5% in early 2024, but further declines are likely as the NBP's easing cycle accelerates. Key tailwinds include:

1. Real Rate Compression: A lower nominal rate in a disinflating environment will shrink real yields, boosting bond prices.
2. Curve Steepening Risks: Short-term rates are set to drop faster than long-term rates, favoring duration exposure.
3. Eurozone Spillover: As the ECB's policy pivot gathers momentum, Poland's bonds could benefit from reduced external financing costs.

Risks and Considerations

The primary risk lies in MPC fragmentation. If Glapiński's caution prevails, the pace of cuts could lag expectations. Additionally, a sudden wage spike or geopolitical shock—such as a reprise of energy price volatility—might reignite inflation. Investors must also monitor the zloty's stability; a sharp depreciation could force the NBP to pause easing. Lastly, Poland's fiscal stance—projected to widen the deficit to 5.4% of GDP in 2024—remains a long-term concern, though it has not yet derailed bond markets.

Investment Strategy: Position for Yield Declines

The optimal trade involves overweighting 10-year PLGBs, which currently offer a 4.5% yield with a duration of ~8.5 years. Investors should also consider shorting short-term bonds (e.g., 2-year maturities yielding 4.8%) to capture curve flattening. For added protection, pairing this exposure with a long position in EUR/PLN could hedge against currency risks if the zloty weakens.

Conclusion

Poland's monetary policy divergence is a microcosm of global disinflation dynamics. With inflation projections falling faster than expected and the NBP's dovish wing gaining influence, fixed-income investors have a rare opportunity to capitalize on yield declines. While risks persist, the evidence suggests that long-duration bonds are poised to outperform as Poland's rate cuts exceed consensus expectations. The time to position is now—before the market fully prices in the NBP's shift.