As economies slow around the world, central banks are expected to quickly return to easy-money policies, most commonly manifested in their efforts to force down interest rates. Polish labor market data for November confirms both wage growth and employment deteriorating. Wage growth in the corporate sector is expected to remain in double digits in 2024.

Despite the decline in inflation in 1Q24, according to ING, the prospects for a return of inflation to the NBP’s target remain remote: the NBP Governor Adam Glapiński assessed that the “inflation overhang” due to continued intervention in energy prices and lower VAT on food is around 5 pp – a full withdrawal of anti-inflation measures would immediately boost annual CPI by that amount.

Most central banks claim that their policies are guided by efforts to ensure “price stability” and keep price inflation “low” – variously defined. In the eurozone and the US, for example, the monetary policy seeks to ensure a two-percent inflation standard. However, these look like political slogans, and what matters is how long it takes each central bank to hit the panic button in the face of bad economic news.

If unemployment rates head upward, and if economies fail to perform as hoped – especially in election years – central banks are expected to open the money floodgates. Last September, Poland’s central bank cut its main interest rate by 75 basis points to 6.00%, ahead of October elections that sent the zloty currency tumbling against the euro. The zloty plunged 1.5% to its weakest level since May and banking stocks dropped over 5%.

The NBP’s target inflation rate is 2.25 percent. Yet price inflation in Poland was above 10 percent as of August. Moreover, the price index hit a 23-year high in its growth rate, reaching 19.2 percent. Inflation in 2023 was the worst it’s been since the old days of the 1990s when Poland was recovering from the centrally-planned economic system.

At the same time, Poland’s economy showed signs of slowing down. With price inflation running four times higher than the target rate, it’s hard to see how a 75-basis point cut would be the appropriate policy, just a few months after price inflation nearly hit 20 percent.

At the beginning of this year, the MPC left interest rates unchanged. The council acknowledged that the recovery is taking place, though showing less confidence. It expects a significant fall in headline inflation over the coming months, but only a smaller fall in core inflation. The CPI inflation trajectory is subject to several risks, including the pro-inflationary impact of fiscal easing, regulatory decisions (lifting the energy price freeze), and the uncertain economic outlook. According to ING, the high wage ratio makes disinflation less convincing in Poland than in other countries, especially in the medium term.

Will NBP be just the first domino to fall, with plenty of central banks behind it, as slowing economies become political liabilities for parties in power? Stay tuned.