Sluggish world economy keeps Polish interest rates low

Poland’s reference interest rates were kept at 0.10 percent at the September meeting of the National Bank of Poland’s Monetary Policy Council, as annual inflation for August was confirmed at 2.9 percent.

“Prices of many goods are lower in world markets than at the beginning of the year. Slower business activity is helping keep inflation low in many countries, including Poland’s main trading partners,” NBP chairman Adam Glapiński said, in a filmed statement at the end of the August MPC meeting. The official press conferences have been cancelled since April because of the pandemic.

The rate setters had cut rates three times in the spring to a level barely before zero, in an attempt to crank up the economy, which had been put into lockdown, even although inflation was nearing five percent.

The intention was to help indebted companies and mortgage holders struggling to make repayments on loans and encourage lending.

The National Bank of Poland’s economists consider that the worst is over after a slump of 8.2 percent in GDP in the second quarter, and business sentiment is recovering. With inflation now lower, some bank analysts were hoping that interest rates might go up again.

Bank profits were down significantly in the second quarter, with both regulators and lenders complaining of a credit crunch, meaning that lenders are not funding investment, because of the state of the economy. This can lead to a vicious cycle if the economy cannot recover because it is starved of funding.

The central bank is therefore buying up bonds from banks in order to improve their liquidity. The NBP has confirmed it will continue this policy for the foreseeable future.

The majority of economists asked by PAP believe that interest rates will stay at their current level, at least until Mr Glapiński leaves office in 2022 and most of the members of the rate setting team are replaced.

Food prices are 1.8 percentage points lower than in July overall and only 3.1 percent higher than in August last year, according to the Statistics Poland data, which confirmed the flash estimate made earlier this month. Prices of items such as poultry, which shot up last year, are 3 percentage points lower this year.

Meanwhile services like restaurants are cheaper than expected.