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The downward revision of May's CPI off the back of lower core inflation increases the likelihood that the National Bank of Poland may kick off its monetary easing cycle at its upcoming meeting in July. The picture should be a lot clearer in September, though, so it's a close call. We'll be keeping a close eye on any communication from the central bank.

Poland's final CPI report brought a downward revision of May CPI inflation to 4.0% year-on-year from a flash reading of 4.1% YoY and 4.3% YoY posted in April. In May, prices of goods jumped up by 3.3% YoY, while services prices increased by 6.0% YoY, compared with 3.5% and 6.3% respectively in April. Disinflation was facilitated mainly by a further decline in gasoline prices (-11.4% month-on-month), limited pressure on food prices and continued moderation of core inflation. We estimate that core inflation excluding food and energy prices declined to 3.2% YoY in May from 3.4% YoY in April. In monthly terms, substantial price drops were reported in foreign tourism services (-9.1% YoY) and transport services (-7.0% YoY).

According to our forecasts, headline inflation will take a nosedive in July, reaching levels close to the inflation target amid a high reference base (partial unfreeze of energy prices for households in July 2024), a drop in gas bills as the energy market watchdog (URE) approved lower prices and a continued fall in core inflation. We expect that in September, the URE will lower new regulated electricity prices further than the current PLN623/MWh and not far from the current cap of PLN500/MWh expiring in October. As a result, we do not foresee a jump in energy prices in the fourth quarter of this year.

Global inflationary tendencies are also favourable, with core market inflation heading south. In the euro area, this is already at the European Central Bank's target, and US price data has surprised to the downside recently. The weaker American dollar and relatively low commodity prices (including crude oil) also support a decline in inflation. The concerns about the pro-inflationary impact of tariffs on prices of tradeable goods waned a bit as trade wars de-escalated somewhat. The rout in the Middle East is a new upside risk for oil prices, though.

In our view, headline inflation is likely to stabilise in the coming months following a decline in July. That means the Monetary Policy Council has substantial room for monetary easing and may start its rate-cutting cycle. The downward revision of the May print increases the odds of a July cut, but some policymakers may prefer to wait for more evidence on the scale of the inflation decline over the summer months, as well as the outlook of electricity prices and the fiscal outlook for 2026. That is why our baseline scenario leans towards the September cut, when new regulated prices for electricity and the draft bill of the 2026 state budget will be known.

Nevertheless, it'll be a close call as to whether the next rate cut materialises in July or September (without a meeting in August). We'll be closely watching all public engagements of the MPC members ahead of the July decision. At the end of 2025, the main policy rate may fall to 4.50-4.75%, with the easing cycle likely continuing into 2026.

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