BNY said the National Bank of Poland’s March rate cut did not fully account for inflation risks linked to the Iran conflict. The note said the NBP statement did not refer to a conflict and only cited “changes in the global commodity prices and inflation, amid geopolitical tensions” as a risk factor.
After the decision, Polish inflation rose to 3% year on year in March. This included a 1.0% month-on-month rise, with input prices increasing.
Regional Central Banks And Inflation Outlook
The report said other Central and Eastern Europe (CEE) central banks have adjusted their near-term outlooks without committing to specific moves. It added that current CEE inflation data does not yet justify a strong policy response.
It said market pricing for the European Central Bank and the Bank of England appears overstated given weak Eurozone and UK growth. It added there is limited room for aggressive tightening without causing a material downturn.
BNY said there are upside risks to CEE policy pricing in coming months, starting with the NBP. It said this could change if markets reprice expectations for the ECB.
Looking back at the analysis from early 2025, the view that the National Bank of Poland (NBP) underestimated inflation has proven correct. The rate cut in March 2025 was followed by persistent price pressures stemming from the regional conflict. Polish inflation accelerated through the summer of 2025, peaking at 5.8% in August before ending the year at a stubborn 4.2%, well above the central bank’s target.
Implications For Rates Markets And Derivative Positioning
As a result, the NBP had to completely reverse its policy, hiking its main rate twice in the second half of 2025 for a cumulative 75 basis points. Traders who positioned for this hawkish repricing, perhaps by using interest rate swaps to pay a fixed rate on the Polish zloty, would have profited handsomely. This policy reversal caught many off guard, as the initial market consensus had been for further easing.
At the same time, the skepticism about aggressive tightening from the European Central Bank (ECB) and Bank of England (BoE) was also justified. Persistently weak economic growth, with Eurozone GDP expanding by a mere 0.4% for the full year 2025, gave these central banks very little room to maneuver. Markets had to drastically scale back the aggressive rate hike path they had priced in early last year.
This policy divergence between Poland and the core of Europe continues to present opportunities for derivative traders in the coming weeks. We believe the market is still underpricing the NBP’s resolve to keep rates high, while the ECB is likely to signal the start of an easing cycle before summer. This suggests that trades positioning for this gap to widen, such as receiving fixed rates on euro instruments while paying fixed on Polish zloty instruments, remain attractive.
The upcoming Polish inflation report for March will be a key event, as another strong reading would almost certainly cement the NBP’s hawkish stance. Traders could use options, such as buying payers on short-term Polish interest rates, to position for this potential volatility. This offers a way to profit if inflation once again proves stickier than the market currently anticipates.
