bne IntelliNews -

For the first time in three months, the Polish central bank didn't spring a surprise, as it announced on December 3 that it will keep rates on hold at 2%. While the Monetary Policy Council (MPC) of the National Bank of Poland has lived up to its rambunctious reputation in recent months, improved economic indicators convinced most of its members that there should be no more rate cuts this year.

Following a shock 50-basis-point cut in October, the NBP turned expectations on their head again last month as they held rates steady at the record low level. However, since then third-quarter GDP growth of 3.3% and other macroeconomic indicators have offered a brighter picture of the economy. 

The decision to keep rates at 2% until the end of the year reflects recent claims that the MPC is now focused more on growth than inflation, which continues to lag the official target of 2.5% for the year by some distance. mbank said on its Twitter account that it's, "hard to see the MPC moving to neutral stance (or ruling out further cuts)" due to the massive undershooting of the inflation target.

Reports recently have suggested deep and personal splits on the MPC. That speculation especially surrounds the influence that Governor Marek Belka still commands. Like many economists, he has spent the last month insisting that further cuts are needed, having said in October that he wanted to see any cuts "concentrated in time."

William Jackson at Capital Economics suggests the voting on the 10-member panel was likely finely balanced. The decision to hold was "probably passed by the slimmest of margins," he writes in a note. 

Temporary clarity

Prior to the meeting, the fall in inflation in October to -0.6% had raised speculation that the central bank might lower interest rates again, but that theory was not widespread. Neither did the European Central Bank's continued dovish push towards possible quantitative easing convince most. 

The decision to remain on hold will disappoint many analysts, who insist the central bank needs to offer more stimulus to growth and counter deflation. At the same time, the market will be relieved to see more clarity of guidance from rate setters, even if that improvement comes via open disagreements between various members conducted in the media and goes against the governor's views for now.

"Looking ahead," writes Jackson, "large amounts of spare capacity in the economy, as well as the recent fall in oil prices, will keep a lid on inflation. We expect the headline rate to remain below the bank's 2.5% target over the coming years. Accordingly, monetary conditions are likely to remain extremely loose. But so long as the economy continues to grow at rates of 3-4% y/y, additional interest rate cuts seem unlikely."

However, others are less convinced, especially with speculation rife that the central bank is holding fire until after the end of year state debt measure. Poland is struggling to reduce its debt to fit inside EU regulations, and with much of the portfolio denominated in foreign currency, weakening the zloty with a rate cut would make the effort that much harder.

"Indeed, many participants, us included, foresee rates being cut again in Q1 2015 despite [central bank] guidance to the contrary," write analysts at Commerzbank. "We think that the Eurozone growth cycle will remain timid next year, and that Eurozone inflation will surprise to the downside, falling soon to zero. The hawk-dove balance within the MPC also stands at a point where only one swing voter need change from "wait and watch" to "cut" for the next reduction to go through. We forecast the NBP policy rate to drop to 1.5% in Q1 2015 and, thereafter, remain flat through end-2015."