National Bank of Poland reveals its cards. Surprise increase in inflation expectations

The central path of the NBP forecast assumes that average consumer inflation in Poland (measured by the CPI) In 2024 it will reach 3.7 percent, in 2025 it will rise to 5.2 percent, and in 2026 it will fall to 2.7 percent. – According to the July forecast of the National Bank of Poland.

“Information and data that arrived after the March forecasts closed have contributed to a downward revision of the expected economic growth rate path and an upward revision of the CPI inflation forecast for 2024-25. At the same time, expectations for these variables have been raised and 2026 has not changed significantly,” the report wrote.

“The comparison is with the March forecast version, which was developed with the assumption that protective measures in food and energy prices would be maintained throughout its horizon, which was the central scenario in the previous forecast round,” he added.

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NBB Bank

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Let us remind you that comparing the July forecast with the March forecast is difficult, because the spring forecast was prepared in two extreme variants (both unrealistic): full maintenance and full continuation of the anti-inflationary shields in the form of energy and food prices (a “mixed” scenario was implemented, i.e. the VAT on food was restored since April, and the freeze on energy prices will be gradually lifted from July). Let us note that the central scenario of the March forecast – prepared on the assumption of full maintenance of the shields – assumes an average CPI inflation of 3%. In 2024, also 3.4% in 2025 and 2.9% in 2026.

Taking into account the quarterly forecast, The peak of inflation will fall in the first quarter of 2025. According to National Bank experts, it will then reach 6.3 percent. It is much higher than 2.5 percent. It was recorded in the second quarter of 2024. After reaching the peak, the CPI is expected to decline, but very slowly, which – as President Adam Glabinski said on Thursday – will make it impossible to cut interest rates, perhaps even in 2026. The inflation target set by the Bank of Japan (2.5 percent) is due to be achieved in the fourth quarter of 2026, i.e. at the end of the forecast horizon. During this period, the CPI is expected to reach 2.5 percent.

According to the National Bank of Poland, core inflation is expected to reach 4.2% in 2024, 3.8% in 2025 and 3.5% in 2026. This indicator does not take into account energy, fuel and food prices, which are mainly determined in international markets and over which the central bank has less influence. Therefore, core inflation better reflects domestic pressure on price increases.

By comparison, the March forecast assumed 4.7% core inflation in 2024, 4.5% in 2025 and 4.1% in 2026, so the new forecast is slightly lower in this regard, due, among other things, to: the rapid slowdown in commodity prices.

Why will inflation accelerate in 2025?

The report’s authors point out that The most important factor increasing the path of CPI inflation in 2024-25 compared to the March forecast is legislative changes.which was presented after the previous forecasts were closed, which contributed to the rise in energy and food price dynamics.

“As a result, the dynamics of electricity, natural gas and district heating prices in 2024-2025 are higher than in the previous forecast round. At the same time, food prices are rising due to the 5% VAT on basic food products restored from April 1 of this year,” it is written.

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NBB Bank

The report notes that the upward revision of energy and food prices was also due to higher expectations of energy and agricultural raw material prices in global markets compared to the previous round.

“Food prices will rise further in the coming quarters due to unfavourable agro-meteorological conditions prevailing this spring, which are affecting domestic fruit prices,” the letter said. The report added that apart from the uncertainty about the regulatory scope of energy prices, the path of inflation will also be influenced by, among other things, fiscal policy, wage dynamics, inflation expectations and consumers’ propensity to save and consume.

The scope for upward revision of consumer price dynamics in the central scenario is limited by weak demand pressure reflected in a narrowing output gap. Compared to March forecast.

“This is a result of taking into account worse-than-expected economic activity data in the first half of this year, which indicates that the slowdown abroad, including in the German economy, had a significant impact on the economic situation in Poland,” he wrote in the latest report.

The report indicates that the output gap will remain negative over the forecast horizon, and in 2026, the slowdown in GDP growth will contribute to a further decline in demand pressure, reinforcing the process of slowing inflation in the Polish economy.

The document also indicates that the central projection path assumes wage growth of 12.9% in 2024, 8.6% in 2025 and 6.8% in 2026. This is one of the main factors driving up inflation (the impact of higher costs on businesses and increased purchasing opportunities for consumers). The new forecasts are slightly higher than the March forecast, when wage dynamics were expected to reach 11.5%, 7.1% and 7.1%, respectively. and 6.7%.

At the same time, NBP assumes that the labor market will remain strong: The unemployment rate is expected to remain at 3.1% in 2024 and 2025, In 2026, it will rise to 3.3%. According to preliminary data, in June it hit a record low of 2.9%.

GDP dynamics will not accelerate to this extent.

In the July forecast, the central path assumes GDP growth of 3.0 percent in 2024, 3.8 percent in 2025, and 3.1 percent in 2026. By comparison, in March, growth was projected at 3.5 percent, 4.2 percent, and 3.3 percent, respectively. Clearly, the recovery forecast has largely fallen short.

NBP points out that the assumption of a significant reduction in protectionist measures in the area of energy and food prices also has a negative impact on domestic GDP growth over the forecast horizon.

“But at the same time, the reduction in the scope of these activities, due to the higher path of energy prices, may contribute to an increase in inflation expectations and nominal wage dynamics, weakening the impact of the decline in demand pressure on prices,” it was written.

“The decline in GDP growth compared to the March forecast is also affected by the upward revision in the path of energy raw material prices, which affects the operating costs of enterprises and additionally reduces household income in general,” he added.

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NBB Bank

The NBP estimates that consumer inflation expectations, as measured by the balance sheet statistics, were still below their long-run average despite some increase in the second quarter of this year. Meanwhile, in the second quarter of this year, the NBP wrote that the balance sheet statistics for business inflation expectations increased.

“Due to the structure of the survey questions asked to consumers and businesses, in which respondents relate their expectations to current inflation (enterprises) or its perception (consumers), the increase in balance sheet statistics occurred under conditions of much lower inflation than in previous quarters. This is not synonymous with an increase in inflation expectations,” the National Bank of Poland reported.

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National Bank of Poland reveals its cards. Surprise increase in inflation expectations

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