In March, headline inflation in Poland fell to 1.9% year-on-year, below the central bank’s target of 2.5% (+/- one percentage point). However, it has likely come about in an unsustainable manner. ING Bank believes that the March reading is likely to be a local low, and CPI inflation will start climbing again over the coming months.

Firstly, the 0% VAT on food expired at the beginning of April. While some large retailers pledged to keep prices of key food products unchanged, analysts expect higher taxes to eventually feed into prices. This will likely prove to be a slower process than a one-off adjustment.

Second, the energy shield will expire in the second half of 2024, leading to an increment in electricity prices.

Third, and most importantly, core inflation stays elevated and is expected to remain sticky amid a tight labor market, robust wage growth, and an expected recovery in consumer demand driven by the highest growth of disposable income in over two decades.

ING expects that over the coming months, the MPC will focus more attention on core inflation. Two-thirds of disinflation in Poland is currently driven by low price dynamics of tradeable goods, food, and favorable developments in energy commodities. At the same time, core inflation remains high (around 4.6% YoY in March). Services prices in particular continue expanding at a high pace (7% YoY in February). With wages expanding at a double-digit pace, more effort is needed to bring inflation to the target in the medium term.

In fact, the MPC is likely to stick to its cautious approach and may refrain from monetary easing this year. Upside risks to the inflation outlook will be the main rationale behind keeping rates at a relatively high level over the coming months. The debate on monetary easing may only start in the fourth quarter of this year if the upswing in inflation turns out lower than feared and the medium-term outlook improves.