The National Bank of Poland (NBP) cut its reference interest rate by 75bp to 6% on September 6, delivering a shock to the market, which expected only a 25bp reduction.

The NBP has been sending out increasingly clear messages that a cut was imminent in the context of inflation easing to just over 10% y/y in August from the peak of over 18% in February. The ongoing economic slowdown – with GDP deepening its contraction to -1.4% y/y in the second quarter – only improved the odds for the start of a monetary easing cycle as soon as September.

The NBP, however, surprised with a reduction three times the expected value, citing “lower than expected demand pressure [that] will exert influence on a faster return of inflation to the NBP's target,” the central bank said in a statement.

“Taking into account these conditions, as well as the time lag with which monetary policy decisions affect the economy, the [NBP] has adjusted interest rates, which will support reaching … [the] inflation target in the medium term,” it added.

Analysts say that the shock cut means no more easing will take place before the first quarter of 2024.

“The new reference rate outruns market expectations by six months. The cut occurred even though inflation is still above 10%, which was claimed to be the threshold for any reduction of the interest rate,” Erste wrote in a comment.

The language of the NBP’s statement – specifically the use of the word “adjustment” – also points to the move being a one-off, with the central bank returning to wait-and-see mode.

The market reacted strongly to the scale of the easing. The Warsaw Stock Exchange's banking index, WIG-Banki, fell nearly 4% with several big lenders - Pekao, Millennium, and PKO BP - falling almost 5%.

The NBP's decision also pushed the zloty down by almost 2% against the euro and the US dollar.

“Today's decision signifies a reduction in the interest rate differential between Poland and abroad, potentially weakening demand for the Polish złoty,” Bank Millennium said. 

“This was reflected in the depreciation of the złoty … which, of course, is not helpful in achieving the inflation target,” it added.

In contrast to the expected market reaction, the NBP said in its communiqué that a stronger zloty would be instrumental in lowering the inflation rate.

The NBP’s decision also comes in a clear political context.

The governor of the central bank, Adam Glapinski, has been a longtime associate of the ruling Law and Justice (PiS) party.

PiS is engaged in a bitter election fight against the opposition ahead of a general election due on October 15. The radical cut now sets the scene for lowering mortgage repayments in the coming months and could push forward economic recovery.

While those effects will not materialise before the election, the decision by the NBP gives the government grounds to up the rhetoric on the economy in the crucial weeks of the campaign.

Governor Glapinski is expected to deliver more context on the decision during a press conference on September 7.

However, some analysts say that the surprise move has stripped Glapinski and the NBP of credibility and predictability.

“Forecasting future actions [by the NBP] is subject to significant uncertainty,” Bank Millennium wrote.