Poland's MPC to cut rates to 3.5 pct, GDP growth to support necessary fiscal adjustment (interview)

"Our stance on future interest rates and inflation in Poland is rather dovish. We were one of the few forecasting institutions that expected a rate cut in October [of 25 basis points - PAP ed.]. In our opinion, over time there will likely be a need to lower them to the target level of 3.5 percent, and this is a forecast that we have maintained for a long time," Daly told PAP Biznes.

"(...) We see no need for rate hikes, at least within the forecast horizon. We believe that not only in Poland, but also throughout the Central and Eastern European region, interest rates are generally too high (...)," he added.

Goldman Sachs' chief economist for the CEEMEA region assessed Poland's monetary policy in the current adjustment cycle as conservative.

"If you look at the history of the National Bank of Poland, it has always been quite conservative in adjusting monetary policy, especially when it comes to accommodative policy. Other central banks are usually more proactive and lower interest rates relatively quickly. The NBP, not only during governor Glapinski's term of office, but also before that, has been relatively slow and cautious in lowering rates," Kevin Daly pointed out.

The economist believes that in the case of Poland, thanks to the high frequency of MPC meetings (at the beginning of every month), even if the Council decides to lower rates by only 25 basis points each time, a significant effect can be achieved in a relatively short time.

"(...) which is why I believe that further cuts in such steps will be sufficient," Daly added.

In October, Poland's Monetary Policy Council once again "adjusted" interest rates, lowering them by 25 basis points to 4.50 percent in the case of the reference rate. At that time, the market was roughly divided in half between those who expected rates to stabilise and those who expected them to fall.

After the last meeting, Poland's central bank NBP governor announced that the MPC sees room for further small rate cuts towards a target rate of around 4.0 percent.

Goldman Sachs economists predict that economic growth in Poland will remain relatively strong, reaching 3.5–4.0 percent in 2026.

"It is worth noting that since the outbreak of the COVID-19 pandemic, economic growth in Poland has been significantly higher than in other Central and Eastern European economies, thanks to the inflow of EU funds and greater growth potential in Poland," Daly pointed out.

According to Goldman Sachs, the main potential threats that could disrupt Poland's economic development come from outside the country, while domestic risks, including fiscal policy, are relatively minor and do not raise any major concerns.

"The biggest threat to the global economic outlook, as well as to Poland, is the risk of a global slowdown caused by tariffs, trade policy, and possibly also the possibility of a deeper recession in the US. I believe that domestic fiscal policy should be tightened somewhat, as it is currently a little too loose, but the external balance looks relatively stable," GS' chief economist assessed.

Daly noted that the increase in Poland's fiscal deficit is significant, likely to reach nearly 7 percent of GDP this year and 6.5 percent of GDP next year, and this is too high of a level in the long-term perspective, requiring a downward adjustment. This assessment has been lately confirmed by Poland's finance minister.

"However, these risks are well understood by the market and are the subject of its particular attention. In our opinion, if anything, asset swap spreads are too wide. I do not want to downplay these risks, but in our view, the fiscal risk in Poland is exaggerated. Especially considering the support that SAFE loans from the EU are likely to provide to finance defence spending (...) which is likely to significantly ease the issuance side," he added.

Daly pointed out that economic growth in Poland is relatively strong, which is expected to translate into higher tax revenues over time; the balance of payments is in relatively good shape, and the external balance shows no signs of concern.

In conclusion, Daly noted that Poland's economic performance, not only recently but over the last 15–20 years, is among "the most impressive examples of economic growth not only in Europe but worldwide."

"The fact that Poland has achieved an average economic growth rate of 3.5 percent per annum, despite a population decline of 0.5-1 percent per year, is evidence of an extraordinary pace of income convergence, which is very impressive," the chief economist at Goldman Sachs' CEEMEA region department assessed.

In his view, the driving factors behind this convergence were primarily EU membership (seen as absolutely crucial success factor), but also the ingenuity and dynamism of Poles and the Polish economy.

"Poland has been a great success not only in itself, but also for the EU," Kevin Daly concluded.

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