Poland to Cut Rates as Inflation Dips Below 3%

Poland’s central bank is set to cut interest rates for the first time in over a year as inflation continues to ease, reflecting a broader trend of cooling price pressures and improving economic conditions. The move, expected to be announced on September 3, will mark the latest step in the National Bank of Poland’s (NBP) shift from tightening to loosening monetary policy amid a slowing inflationary environment.

Introduction
The decision follows headline consumer price inflation (CPI) falling to 2.8% year-over-year in August, the lowest level since June 2024 and below the NBP’s target band. With core inflation also trending downward, the bank is poised to reduce its benchmark rate by 25 basis points, bringing it to 4.75%. The easing reflects the central bank’s response to a weakening inflationary backdrop, a controlled labor market, and a fiscal environment that, while still expansionary, is no longer a major driver of price pressures.

Data Overview and Context
The August CPI reading of 2.8% marks a notable deceleration from 3.1% in July and comes in below market expectations. Over the past two years, inflation in Poland had surged due to rising energy costs, supply chain bottlenecks, and a tight labor market. However, the recent trend has shown a steady decline, supported by falling energy prices and moderating wage growth. The NBP’s target inflation rate is 2.5%, with a tolerance range of ±1 percentage point, meaning current levels are within acceptable bounds.

| Indicator | August 2025 | July 2025 | 12-Month Average |
|----------|-------------|------------|------------------|
| Headline CPI (y/y) | 2.8% | 3.1% | 4.2% |
| Core CPI (y/y) | 3.1% | 3.4% | 4.5% |

The data is based on flash estimates from Statistics Poland and is subject to revision. Methodologically, headline CPI includes food, energy, and other goods and services, while core CPI excludes volatile components like energy and food. The NBP’s decision to cut rates is also informed by expectations that inflation will remain near its target in the near term, supported by stable wage growth and a controlled fiscal environment.

Analysis of Underlying Drivers and Implications
The easing of inflation is primarily attributed to lower energy prices and a moderation in consumer demand. Despite a solid GDP growth rate, the economy is not overheating, and inflationary risks are diminishing. Wage growth, which had been a key concern for the NBP, has also slowed to 7.6% year-over-year in July, offering further relief to policymakers.

Looking ahead, the NBP’s rate cuts are expected to support economic activity by reducing borrowing costs for households and businesses. However, the central bank has signaled caution about future moves, citing the need to monitor fiscal developments. The recent revision of the 2025 budget deficit to 6.9% of GDP—higher than previously projected—has raised concerns about potential inflationary spillovers, particularly if the fiscal expansion persists into 2026.

Policy Implications for the National Bank of Poland
The NBP’s rate cut is part of a broader strategy to align monetary policy with the current inflationary environment while maintaining flexibility to respond to future developments. The central bank’s statement emphasized that the decision was driven by the decline in inflation and the need to avoid excessive tightening. However, it also noted that wage growth and fiscal developments remain key risks to the inflation outlook.

Governor Adam Glapinski’s upcoming press conference will be closely watched for further signals on the bank’s policy stance. While the September cut is expected to be the first in a series of easing measures, the NBP has indicated that it may pause in October to assess the impact of the latest rate reduction and the evolving fiscal landscape.

Market Reactions and Investment Implications
The decision to cut rates is likely to have a positive impact on Polish equities and the zloty, as lower borrowing costs support corporate earnings and attract foreign capital. However, concerns about fiscal expansion may temper the zloty’s gains against the euro and dollar.

In fixed income markets, Polish government bond yields may see a modest decline following the rate cut, though elevated fiscal deficits could limit the extent of the move. Investors may also shift allocations toward sectors benefiting from lower interest rates, such as real estate and consumer discretionary.

For international investors, the NBP’s easing cycle presents an opportunity to reassess exposure to emerging markets, particularly as inflation risks in other major economies remain elevated. However, the potential for tighter fiscal policy in 2026 could introduce volatility, requiring a balanced approach to risk management.