Interest rates will not return to pre-crisis levels for a long time
Inflation will be weighing on us for a long time to come. However, even when we finally manage to achieve and stabilise the price growth at the level of the inflation target, according to experts this will not mean an automatic reversion to the former level of interest rates. They may remain within the 3% range even for years to come. This is hardly good news for mortgage borrowers.
“Cheap times” are at an end
Most experts agree that the second half of 2023 will see the start of the much-awaited cycle of interest rate cuts. It is hard to disagree with this statement, given that all signs point to inflation levels dropping below 10% as early as late August/early September. The approaching elections will probably only strengthen the determination of those in power to persuade the Monetary Policy Council to cut rates even before that date.
Further arguments in favour of initiating a cycle of cuts are, of course, the steadily strengthening zloty and incoming signals of an economic slowdown and falling consumption.
However, all of this does not mean that any interest rate cuts should be radical. Most experts believe that the low level of interest rates in the previous decade, which was kept at 1-2% for years and at times even fell below 1%, was a misguided policy that should not be repeated. It was certainly a strategy unsuited to the current economic conditions.
According to Paweł Borys, President of the Polish Development Fund, even a stabilised price increase within the limits of the inflation target should translate into a reference interest rate of around 3-3.5%. The PFR chairman points out that, once the inflation situation has calmed down, interest rates should become dependent on the rate of real GDP growth. The tempo of GDP growth admittedly slowed down considerably in recent months, but is expected to jump back to around 3-4 per cent soon.
A waiting game
The year 2023 is considered by many market observers to be a kind of transition period. Inflation is slowing down, interest rates have been frozen for a few months now, prices are stabilising, above all in key sectors of the economy such as energy. Slowly, the economic situation is also picking up pace again. And all this despite the still turbulent international situation and the volatility of other external factors affecting the domestic economy.
According to the PDF president, the current drivers of Polish industry are investment and export, and in his opinion they will become even more important to the overall economic situation in the coming years.
However, the question remains open as to whether this waiting game will be concluded as soon as autumn or only at the beginning of next year. The majority of experts believe that the cycle of interest rate cuts will not start until the end of the summer, that is, in September. On the other hand, only few show caution by suggesting that the freeze in interest rate levels will last until the end of this year.
The most likely scenario seems to be a mini-cycle of three reductions, month after month, in the last quarter of this year. The first change would therefore await us as early as October. According to Paweł Borys of PDF, the cuts will continue throughout next year, perhaps with short regular breaks, to reach a level of around 5 per cent at the end of 2024.
There is no need to rush
The Monetary Policy Council is currently in an unenviable position. On the one hand, it has to react to the moderately favourable economic situation and the positive signals coming from the economy and start the process of lowering interest rates. However, its members still need to bear in mind that inflation is persistently at a very high level and that even a drop below 10 per cent will not be an excuse for excessive easing. The MPC will have to balance very skilfully over the coming year between what economic indicators suggest and the prudence dictated by inflation levels. Only then can we successfully approach the inflation target.
We should also take into account the fact that within this entire complex mechanism not everything depends on the Polish economy and those responsible for monetary policy. The influence of foreign markets and policymakers here cannot be understated. And while there are many indications suggesting that rate increase cycles are also coming to an end in the Eurozone and the US, these are analyses based solely on extrapolations of current trends. Meanwhile, in recent years reality, including the economic one, has more than once demonstrated its continued ability to surprise.
Author: Krzysztof Kotlarski – editor at Executive Magazine
Last Updated on August 17, 2023 by Krzysztof Kotlarski