Poland's energy price freeze increases probability of interest rate cut in March (opinion)

On Tuesday, the government adopted a bill to freeze electricity prices for households in 2025. The maximum price of PLN 500 (EUR 115.45) per MWh will remain in force until the end of September 2025, and the zero rate of the so-called 'power fee' will be extended for households in the first half of 2025.

However, the government is moving away from maintaining the maximum price for non-household consumers.

Bank Millennium economists estimate that the legal changes will lower the path of inflation in 2025 and bring the prospect of an interest rate cut closer.

"It should be noted, however, that inflation could be indirectly conquered by an increase in electricity prices for companies, especially at service providers. This effect, if it were to occur, would be protracted and its eventual magnitude will not be large," Millennium experts wrote in a report.

"In addition, prices in other items of the electricity bill, such as the transmission charge or the trading charge, may increase. In our forecasts, we assumed that electricity prices for households would rise slightly more strongly from January 2025, so that average annual CPI inflation in 2025 would be lower than we had expected - around 4.3 percent year on year against an earlier forecast of 4.7 percent," they added.

The economists of ING BSK lender pointed out that the extension of energy price freeze will not prompt Poland's Monetary Policy Council members to cut rates more quickly.

"The extension of the energy price freeze means that inflation in 2025 will be more than 1 percentage point lower than in the baseline scenario of the November [Poland's central bank] NBP projection, but we do not expect this to prompt the MPC to start cutting interest rates more quickly, or to cut them deeper," they assessed.

"While inflation is not expected to exceed 6 percent year on year at the local peak, we still expect it to rise until March next year. Once the March projection is known, the Council will start discussing the start of a monetary easing cycle, but we still expect the first decisions only in the second quarter of 2025," ING experts wrote in the report.

Millennium lender's economists still expect a peak in CPI inflation in March 2025.

"What does not change, however, is the expectation that the peak in CPI inflation next year will be reached in March. In our view, the implementation of the changes presented will support those members of the Monetary Policy Council who would like to see an earlier resumption of the interest rate cut cycle," they pointed out.

"While we still expect this to happen in the second quarter of 2025, there is a growing likelihood of a cut already when the new macroeconomic projection is published in March," the experts added.

Santander BP economists, on the other hand, believe that the reinstatement of the power levy in the second half of 2025 would bump up CPI inflation by 0.35 percentage points.

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