Poland's fuel price cap could ease pressure on central bank to tighten policy

By Pawel Florkiewicz

WARSAW, Oct 2 (Reuters) - A fuel price cap introduced following the Polish president's decision to approve a windfall tax on energy firms will lower inflation towards the target range, reducing pressure on the central bank to raise rates this year, analysts said on Friday.

Before the move, a significant acceleration in inflation had increased pressure on the central bank to tighten monetary policy this year — a move already signalled by some Polish central bankers.

The National Bank of Poland kept its main interest rate at 3.75% in September, maintaining its cautious approach as rising commodity prices and increased energy costs create a risk of a higher inflation rate.

The NBP will make its rate decision on Wednesday, with most analysts projecting no change, although market pricing for the next four meetings is almost evenly split between prospects of steady rates and a rate rise amid accelerating inflation.

"A more favourable short-term inflation outlook allows the Monetary Policy Council to keep interest rates unchanged this year. Inflation could fall to around 3.5% year-on-year in October," ING economists said.

"Our updated scenario projects rate hikes only in the first quarter of 2027."

The Czech central bank left its main repo rate CZCBIR=ECI unchanged at 3.75% last month, as expected, but said a hike would be considered in November, citing mostly domestic risks, as well as upside pressure from fuel prices.

TAX TARGETS EXCESS PROFITS IN ENERGY SECTOR

The windfall tax, which targets excess profits generated by oil and gas companies as a result of the war with Iran, had been blocked in an earlier form by President Karol Nawrocki, an ally of Poland's nationalist opposition who is locked in a bitter feud with the pro-European government.

The new fuel price cap will cost the budget around 5 billion zlotys ($1.29 billion) over the three months to the end of 2026, Energy Minister Milosz Motyka said, which the government hopes to offset with the energy tax.

Inflation rose to 4.0% year-on-year from 3.4% in August —exceeding 3.5%, the upper end of the central bank's target range — the statistics office said on Wednesday, and fuel prices rose by 36.1% year-on-year and 9.2% month-on-month.

Analysts at Bank Millennium said the measure would reduce inflation by 0.6 to 0.7 percentage points and cut price growth to around 3.6% to 3.7% in October, with inflation staying in that range through to the end of the year.

($1 = 3.8859 zlotys)