Kotecki: Poland may mull Oct. rate cut if power prices capped

Kotecki: Poland may mull Oct. rate cut if power prices capped

Poland's government is optimistic about quickly passing legislation to extend a cap on power prices, a move that the central bank governor said would boost the chances for another interest rate cut. The cabinet is likely to approve a bill to prolong the freeze on power prices for the fourth quarter next week, Energy Minister Milosz Motyka told reporters on Friday. The legislation will then be fast-tracked through parliament so that it can come into force later this month, he said.

The government's previous effort to freeze electricity prices for households was vetoed by President Karol Nawrocki, who is backed by the opposition, because that legislation included rules to facilitate more onshore wind farms in the country, which the head of state opposed. The latest legislation is set to prolong the price cap and introduce heating subsidies, which are expected to pass parliament this month.

Market expectations for interest rate cuts within three months increased slightly following Motyka's statement. The market is becoming convinced that this reduction can take place, according to Santander Bank Polska economist Piotr Bielski. He did not rule out a rate cut in October but expected rate setters to opt to wait for the central bank's next inflation projection, due in November.

Poland's electricity price cap for households expires in October and the central bank has pointed to this as an inflation risk factor and a source of uncertainty. The government has now prepared a new bill freezing prices in the fourth quarter and included a wage-dependent subsidy to household heating bills starting this year. Motyka said it would pass parliament this month, adding he did not think further energy price freezing would be necessary.

"In our opinion, there will be no need to freeze prices because we expect energy prices to fall below 500 zlotys per MWh," he told journalists. Market expectations for interest rate cuts within three months increased slightly following Motyka's statement.

Warsaw's utility index outperformed the market, gaining 3.5%. Erste Securities utilities analyst Petr Bartek attributed this to Motyka's comments on electricity prices in 2026 as wholesale market prices fall. "This would be a clear positive move for the sector," he said.

The fiscal cost of these subsidies is significant. The government has allocated 1.3 billion zloty to cover the price gap in 2025, contributing to a projected budget deficit of 5.9% of GDP in 2024 and rising public debt beyond 60% of GDP by 2026. While this fiscal expansion has provided short-term stimulus, it raises questions about long-term sustainability, particularly as energy companies warn of mounting losses from the price cap.

The NBP’s decision to cut its benchmark interest rate by 25 basis points to 4.75% in August 2025 reflects easing inflationary pressures, partly attributable to the price cap extension. Lower energy costs have cushioned households against broader inflationary trends, allowing sustained spending on non-essential goods and services.

Poland’s electricity price caps, a cornerstone of its energy affordability strategy, have created a complex interplay between fiscal stimulus and inflationary pressures. As the government extends these caps to shield households from volatile energy markets, the National Bank of Poland (NBP) faces a delicate balancing act: supporting economic growth while managing the risks of prolonged price distortions.

The phase-out of energy subsidies and price caps poses a clear inflationary risk. If the cap is lifted prematurely, headline inflation is expected to surge to 5% in 2025, with core inflation also rising due to base effects. The NBP’s own projections confirm this trajectory, forecasting inflation above 5% year-over-year in the first half of 2025 and another peak in Q4 2025.

The political uncertainty surrounding the price cap extension further complicates the outlook. President Karol Nawrocki’s veto of a combined bill linking energy price freezes to wind turbine regulations has delayed legislative clarity. If the standalone bill fails to pass before the current cap expires in September 2025, energy prices could spike, triggering a sharp inflationary rebound.

The interplay between Poland’s fiscal energy subsidies and the NBP’s inflation targets underscores a broader tension in macroeconomic policy. The NBP’s recent dovish pivot—cutting rates by 100 basis points since late 2023—reflects its attempt to offset inflationary pressures while supporting growth. However, the central bank’s ability to ease policy is constrained by the fiscal costs of maintaining price caps.

For investors, Poland’s energy price caps and monetary policy interdependence present both opportunities and risks. The short-term stability provided by the price freeze supports consumer-driven growth, making sectors like retail and services attractive. However, the looming inflationary risks and fiscal pressures necessitate caution in energy and infrastructure investments, where policy shifts could disrupt returns.

The NBP’s rate trajectory will be pivotal. If the central bank resumes rate cuts in October 2025, as suggested by forward guidance, it could boost equity markets and corporate borrowing. Conversely, a premature tightening in response to inflation spikes could dampen growth. Investors should closely monitor parliamentary debates on the standalone price cap bill and the NBP’s inflation forecasts for directional cues.

Poland’s electricity price caps have been a double-edged sword: stabilizing household budgets in the short term while creating inflationary headwinds for the NBP. The government’s fiscal interventions have bought time for the economy to adjust, but the long-term risks of subsidy dependency and fiscal expansion cannot be ignored. As the country navigates this delicate balance, investors must weigh the immediate benefits of price controls against the potential for policy reversals and monetary tightening.

References:
[1] https://www.marketscreener.com/news/poland-seeks-to-freeze-fourth-quarter-energy-prices-boosting-rate-cut-hopes-ce7d59d9d889f420
[2] https://www.ainvest.com/news/poland-power-price-caps-monetary-policy-interdependence-balancing-stimulus-inflation-risks-2509/
[3] https://www.bloomberg.com/news/articles/2025-09-05/poland-seeks-to-extend-power-price-cap-enabling-more-rate-cuts