Poland's central bank surprises with sharp interest rate cuts despite double-digit inflation

WARSAW, Poland (AP) — Poland's central bank lowered its interest rates by 75 basis points on Wednesday despite the country's double-digit inflation rate. The move prompted concerns that the central bank was wading into politics with a premature rate cut to help the populist governing party ahead of parliamentary elections next month.

The National Bank of Poland's monetary policy council announced that it was cutting the reference rate from 6.75% to 6%, and other interest rates by the same amount.

The Polish currency, the zloty, immediately lost value against the dollar and euro.

Economists had been expecting a rate cut, but not such a large one. Economic and political observers expressed surprise at such a big cut given that inflation, while declining after reaching over 18% earlier this year, is still running at slightly over 10% annually.

But Poland's robust economy is also showing some signs of slowing down and an election is approaching on Oct. 15 in which the conservative governing party, Law and Justice, is fighting for an unprecedented third term. The central bank’s governor, Adam Glapinski, is an ally of the party and has taken actions in the past to help it.

Marek Tatala, vice president of the free market Economic Freedom Foundation, noted that the central bank cut rates even though inflation is running four times higher than the inflation target, which is 2.5%. He accused the members of the central bank's monetary policy council of having “joined the election campaign” on behalf of the governing party.

A pro-market politician, Ryszard Petru, posted a video on X, formerly known as Twitter, calling the cut a big mistake that will hurt Poles more in the end.

“As a borrower I am of course happy I will pay lower rates,” Petru said. “But I know that with such high inflation, cutting the interest rates is pro-inflationary ... and will eat up our income.”

The move will provide relief to Poles with mortgages who have seen their payments rise in recent times. It should also give a boost to the economy. But it risks creating even greater inflationary pressure at a time when Poles are already suffering from painful rises in the prices of food, rent and other goods and services.

In conditions of high inflation, central banks tend to raise interest rates, a move that can help bring down inflation over time by discouraging consumption.

Interest rate cuts, on the other hand, make financing cheaper and tends to encourage consumers and businesses to spend more.

The central bank has intervened on previous occasions to help the party.

In May, when inflation was at 16%, the National Bank of Poland put up enormous banners on its Warsaw headquarters blaming inflation on the Russian war against Ukraine and the COVID-19 pandemic. “Putting the blame on the NBP and the government for the high inflation is a Kremlin narrative," one of the banners said.