Monetary policy in the shadow of elections. A look at confidence indicators.
The Monetary Policy Council (MPC) has maintained a hawkish stance, emphasizing persistent inflationary pressures driven by rising energy prices, food costs, and services. Its March 12 decision to hold interest rates steady reflects an ongoing belief that inflationary trends remain a concern. The MPC's justification appears tied to preliminary data suggesting marginally higher inflation trends in early 2025, although the comparability of this data is limited due to revisions in the inflation basket and survey samples. The revised data indicating February's headline inflation at 4.9% year on year and a decline in core inflation suggests a more balanced view.
The analysis of historical decisions of the MPC reveals a potentially politicized decision-making process, with its actions historically aligning with ruling-party interests. Under PiS leadership, the Council exhibited dovish tendencies, whereas it adopted a forward-looking, hawkish approach during opposition-led governments. Finding out the MPCs reaction function is complicated due to its apparent change in behavior after the latest elections and its erratic and inconsistent communication. The existing evidence shows that the main drivers of the MPC are current inflation and its expectations over a 3-quarter horizon, but the role of the exchange rate in the decision making is non-negligible.
Economic indicators show a mixed recovery, with slight improvements in manufacturing confidence, real retail sales, and GDP growth (3.2% year on year in Q4 2024). However, business confidence in construction and services remains weak. Consumer confidence regarding the current economic situation has improved slightly, while expectations for the future are deteriorating somewhat.
The upcoming presidential elections add another layer of complexity. Rafał Trzaskowski leads in first-round polling, with Karol Nawrocki and Sławomir Mentzen trailing. Mentzen's recent gain in support gives him roughly a 50% chance of getting into the second round. Geopolitical tensions and voter sentiment toward EU and U.S. alliances are shaping the race, with undecided voters likely to play a decisive role. The interplay between economic policy and political dynamics underscores the challenges facing Poland in the months ahead.
Now read on...
Register to sample a report