MPC's Kochalski on interest rate cuts: I see room for 50-75 basis points

In the opinion of MPC member Cezary Kochalski, given the high uncertainty, an adjustment approach to interest rates is more convincing, and it is difficult to decide today whether there will be room for a cycle of cuts in Q4 2025. By the end of the year, he sees room for 50-75 bps of further rate cuts, including 25-50 bps in July.

"Will there be room for a cycle in the fourth quarter? I cannot decide that today. Given the huge uncertainty, the adjustment approach appeals more to me. It all depends on the incoming data. However, I think that by the end of my term, which ends on December 20 this year, I could imagine room for possible cuts of 50-75 basis points. But it also depends on what happens in July and what the situation will be in the fall," Kochalski told PAP Biznes.

"In May, we made a corrective cut in interest rates, so it could have been a bit deeper than 25 bps. It is hard for me to imagine today that by the next meeting in June there would be data that could revive the discussion on changing interest rates, while July, due to the new projection, could be the time for discussion on a possible further correction. If a decision were to be made in July, I am not convinced that it would be as deep as 50 bps, but I would not categorically rule it out," he added.

NBP President Adam Glapiński announced at the last press conference that the statements of MPC members at the May meeting indicate that if the Council decided to further reduce rates in July or in the fall, the majority would support the cycle. He added that for the central bank, moves of 25 basis points are more convenient than adjustments of 50 basis points, as in May.

Kochalski sees little chance of starting a cycle in July, and if there was a reduction at all, in his opinion it would be another point-by-point, adjusting move.

"I am one of ten members of the Monetary Policy Council, so of course it is difficult for me to decide whether such a majority would be gathered in July," he added.

According to the MPC member, it was possible to adjust the interest rates in May because, firstly, there was a correction of the inflation basket by the Central Statistical Office.

"We accepted this fact colloquially saying 'with the benefit of inventory', nevertheless it lowered the CPI path in the projections. Secondly, the base effect is of great importance. The third issue is the real economic and inflation processes. In the first quarter, there were some weaker data related to economic activity than could have been expected," he said.

Another factor was the lower wage dynamics, which, in the opinion of the MPC member, was unsustainable from the point of view of the profitability of the corporate sector.

"This dynamics has slowed down, but it is still high from the point of view of inflationary pressure. If it continues to slow down, the scenario of possible reductions will strengthen," he said.

Another factor that Kochalski takes into account is the so far rather moderate propensity of households to consume, as shown, among others, by retail sales readings in Q1.

"Another important issue, which I would like to strongly emphasize, is the loose fiscal policy, which is clearly looser than could have been assumed, even at the stage of budget assumptions. There is a big question mark whether fiscal tightening will take place in a rational horizon or not. Finally, we have energy prices, the unfreezing of which from Q4 may increase the CPI path. This is an important factor that may determine decisions in the fall, a lot will depend on the government's decisions, but also on the price situation on the energy market," he adds.

An economist would not attach much importance to the fact that the MPC statement in May omitted the sentence that the current level of interest rates is conducive to achieving the inflation target in the medium term.

"However, there are many indications that the inflation outlook is looking more favourable today than in March or April. I don't want to say that there is no longer a challenge related to inflation, but we have entered the path of more positive scenarios. For example, core inflation has approached the upper band of permissible deviations. Prices of services may finally start to decline thanks to the lower dynamics of labour costs. I interpret this as premises for an improvement in the situation in inflation processes," he argued.

The President of the National Bank of Poland announced at the beginning of May that the topic of reserve requirement parameters would appear on the agenda of the June MPC meeting.

In the context of the excess liquidity of the Polish banking sector, Kochalski sees arguments that could encourage a discussion on changing the interest rate on reserve funds.

"I remember that a few years ago we had a serious discussion at the Council on the issue of the mandatory reserve. It is natural that such discussions take place from time to time at Council meetings, after all, in the monetary policy assumptions we have indicated quite a lot of monetary policy instruments, the basic one is interest rates, but among them there is also the mandatory reserve. There were suggestions from the Council members to introduce this topic to the agenda. I do not know whether the materials on this matter will be ready for June, after all it is a complex and multidimensional issue, but if they were, we will discuss it," he said.

"Central banks around the world have different approaches to this. In the context of the banking sector's excess liquidity, there are arguments that could encourage discussions on changing the interest rate on reserve funds, but this issue needs to be considered very carefully so as not to weaken the effectiveness of the monetary policy being pursued. If only because the consequences of such potential decisions could affect banks in a different way, depending on their profile and policy regarding deposits and loans," he added.

The reserve requirement rate is currently 3.50%, and the interest rate on reserve funds is set at the reference rate, i.e. after the May cut, it is 5.25%.

Rafał Tuszyński (PAP Biznes)

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