Economic comment

Final October CPI inflation data confirmed its decline to 2.8% y/y from 2.9% in September. Full data revealed that service prices fell by 0.2% m/m for the second consecutive month, and their annual growth slowed from 5.8% to 5.6% – the lowest since November 2019. Goods prices slowed from 1.9% to 1.7% y/y. The continued deceleration in inflation was also driven by an unusual lack of food price increases. Fuel prices rose by 1% m/m, while energy prices increased by 0.6% m/m (mainly due to a 2.5% m/m rise in heating prices). We estimate that core inflation fell in October to 2.9% y/y from 3.2% previously. The next CPI reading may be around 2.5–2.6% y/y. However, such a move seems largely anticipated by the MPC, which, we still believe, will wait with the next rate cut until January.

In connection with the progress on the digital euro, as well as the global developments related to digital currencies, we explain in this text what central bank digital currencies (CBDC) are, why central banks are working on them, and what their issuance may entail. We explain that the innovativeness of CBDCs stems from their status as a widely accessibly digital payment instrument which is simultaneously a central bank liability. We also clarify that central banks are working on CBDCs in order to maintain the relevance of public money in an increasingly digital economy. Finally, we argue that even though issuing a CBDC may lead to an outflow of deposits from the banking sector, the actual impact of CBDC on the banking sector will depend on the CBDC’s design and need not be negative.

Today’s conference of the NBP governor Adam Glapiński confirmed, in our view, that the central bank is already close to the end of the monetary easing cycle. Glapiński admitted that the inflation outlook has improved, which has allowed the MPC to ease policy once again, but then repeated several times that interest rates are currently appropriate, at the level where they should be. (...). He said that in the “ideal” scenario when inflation remains fully consistent with 2.5% inflation target, the main interest rate should be at 3.5-4.0%, and his personal view is that 4.0% terminal rate would be OK, not too high for the Polish economy. (...)