Poland's Inflation Easing and the NBP's Policy Dilemma: Timing the Next Rate Cut and Market Implications

The National Bank of Poland (NBP) faces a delicate balancing act. Inflation, which peaked at 6.2% in late 2023, has eased to 4.1% year-on-year in June 2025, but remains above the central bank's target range of 3.5%. Meanwhile, the NBP's reference rate stands at 5.25%—a level last seen during the height of the 2022 energy crisis. With economic growth slowing and wage pressures moderating, the bank has already cut rates twice this year, but the question remains: How far and how fast will it go? For investors, the answer could shape returns in both Polish equities and bond markets.

The Inflation Story: Cooling, but Not Gone

Poland's inflationary pressures have abated, driven by falling energy costs and softer food prices. The Harmonised Index of Consumer Prices (HICP) fell to 3.4% in June, down from 3.5% in May, while core inflation (excluding food and energy) moderated to 3.3%. However, the annual average inflation rate of 4.6% in June—a 0.1% increase from May—suggests underlying stickiness. This is partly due to transport costs, which declined at a slower pace in June compared to May, and administered prices (state-controlled sectors like utilities), which remain a drag.

The NBP's internal projections paint a mixed picture. While it forecasts inflation to fall to 3.1% in 2026 and 2.4% in 2027, external analysts argue this is overly conservative. For example, the government's decision to freeze electricity prices for households until the end of 2025 could reduce inflation by 0.2–0.3 percentage points, potentially pushing CPI below 2.5% as early as July 2025.

The NBP's Dovish Pivot: A Tale of Two Meetings

The NBP's policy stance has shifted sharply. In May 2025, it cut the reference rate by 50 basis points to 5.25%, followed by a surprise 25-basis-point cut in July. These moves reflect a recalibration to a dovish bias, driven by weaker economic activity and falling inflation expectations. The central bank now projects the policy rate to reach 4.5% in 2025 and 3.75% by 2026, assuming inflation continues to trend downward.

However, the NBP's communication remains contradictory. Governor Adam Glapiński has emphasized the need for "fiscal discipline," warning against loose government spending, while the Monetary Policy Council (MPC) has signaled openness to further cuts. This duality creates uncertainty for markets. For instance, while the MPC expects a 75-basis-point cut by year-end, Glapiński's hawkish rhetoric has led to a volatility premium in bond yields.

Equity and Bond Markets: A Tale of Two Reactions

The July rate cut triggered immediate market reactions. Polish government bond yields fell sharply, with the 10-year yield dropping from 5.21% in April to 4.88% by mid-June. This reflects investor optimism about a prolonged easing cycle. However, risks persist. For example, if the government lifts electricity price freezes in Q4 2025 without offsetting measures, inflation could rebound, forcing the NBP to pause its rate cuts.

Equity markets have been more nuanced. The WIG20 index, which had surged to record highs in early 2024, has cooled in 2025, with the Russell 2000 small-cap index underperforming the broader index. This reflects sensitivity to interest rate expectations and political uncertainty. Sectors like consumer discretionary and financials may benefit from lower borrowing costs, but exposure to energy subsidies or fiscal policy shifts (e.g., ahead of the October 2025 parliamentary elections) remains a risk.

Investment Implications: Balancing Opportunity and Risk

For investors, the NBP's easing cycle presents a compelling but cautious opportunity. Here's how to position:

1. Bonds: Short-Duration, PLN-Exposure
   Polish government bonds with maturities of 2–5 years offer a better risk-reward profile than long-duration bonds. Short-term instruments are less sensitive to rate reversals if inflation surprises to the upside. Additionally, a weaker zloty (PLN) versus the dollar could enhance returns for foreign investors, as the USD/PLN rate is projected to fall from 3.74 in May to 3.58 by early 2026.

2. Equities: Sectoral Selectivity
   Focus on sectors that benefit from lower rates and stabilized inflation. Financials (banks, insurers) and consumer discretionary (retail, travel) are prime candidates. Avoid overexposure to energy or defense stocks, which are politically sensitive and vulnerable to policy shifts.

3. Currency: Hedge Against Geopolitical Risks
   The PLN's trajectory depends on global energy prices and EU fiscal policies. Investors holding Polish assets should hedge against potential volatility via currency forwards or options, especially if geopolitical tensions (e.g., EU energy disputes) escalate.

The NBP's Next Move: A Data-Dependent Path

The NBP is expected to cut rates again in September and November 2025, bringing the reference rate to 4.75% and 4.5%, respectively. However, the central bank's forward guidance remains conditional on incoming data. If inflation falls below 3.0% in Q3 2025, as some analysts predict, the NBP could accelerate cuts. Conversely, a surprise spike in wage growth or fiscal expansion (e.g., through the 2026 budget) could delay further easing.

Conclusion: Navigating a Complex Landscape

Poland's inflationary pressures are abating, but the NBP's path forward remains uncertain. While the central bank's dovish pivot supports equities and bonds, risks from fiscal policy, energy prices, and global macroeconomic shifts persist. Investors should adopt a balanced approach, favoring short-duration bonds and sectorally selective equities while hedging against currency and inflationary risks. The NBP's September meeting will be pivotal—watching Governor Glapiński's tone and the MPC's data-dependent reasoning will be key to unlocking the next phase of market moves.