Polish consumer price inflation (CPI) fell to 2% year on year in March (chart), the lowest level in more than three years, data from Poland’s statistical office GUS showed on April 15.

The final reading is 0.1pp higher than the flash estimate published in late March. The inflation rate thus landed within the National Bank of Poland’s (NBP’s) target of 1.5%-3.5% for a second successive month, even though analysts expect that price growth will surge back up later this year.

Inflation is now expected to remain within the NBP’s target band in the first half of the year before rebounding after June in the wake of the government's restoring a higher VAT on food and the phasing-out of the electricity price cap. The exact scope and timing of the hike, which is a political issue as much as it is economic, is still subject to analysis.

“We expect a gradual increase in CPI inflation to 5.2% y/y in December– assuming a 15% increase in gas and electricity prices in July – followed by a gradual decline in 2025,” Santander Bank Polska said in a comment. 

An easing of price growth in the most-weighted food and non-alcoholic drinks segment drove the March reading of the main index, the breakdown of GUS data showed. 

Expanding just 0.3% y/y in March, food price growth eased sharply in the second month after a gain of 2.7% y/y in February.

Price growth picked up slightly in the second most weighted segment of housing and energy, growing 1.3% y/y in March after an increase of 1.1% y/y the preceding month.

Transport saw prices fall 3.9% y/y in March after a decrease of 4% y/y the preceding month, GUS data also showed. 

Prices in another major segment, culture and recreation expanded 4.1% y/y in March, easing versus a gain of 4.4% y/y the preceding month. 

In the alcohol and tobacco segment, prices added 5.2% y/y in March following a gain of 6.7% y/y in February.

In month-on-month terms, the CPI expanded 0.2% in March after growing 0.3 m/m the preceding month.

The March CPI reading hints that Poland’s core inflation eased to 4.6% y/y, remaining “uncomfortably high”, according to ING.

“A tight labour market, high wage growth and prospects for an economic rebound raise concerns that further declines in core inflation will be limited and that the external environment may not be as favourable as they are now in the months ahead,” ING said.

That suggests the NBP will continue to keep the interest rates at the current elevated level until well into 2025.

“High core inflation will be the main argument [for the NBP] to keep interest rates unchanged until approximately the middle of next year,” Santander Bank Polska said.

After aggressive rate cuts in September and October that left the central bank’s reference interest rate at 5.75%, the NBP has held in each of the rate-setting meetings since.