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MPC does not see the projection as an argument in favour of hiking rates

MPC bias without significant changes

As we expected, the Monetary Policy Council has left interest rates unchanged today (the reference rate amounts to 1.50%). The MPC indicated in the statement that "taking into account the present information, including the results of the November projection, the Council judges that in the coming years inflation will run close to the inflation target”. This means a slight change in the tone of the statement compared to the view the Council worded in October. The Council considered then that "the risk of inflation persistently running above the target in the medium term is limited”. Such change is consistent with the results of the November projection (see below) which forecast a slightly higher inflation path in 2018-2019 compared to the July projection. It may therefore be concluded that the MPC bias has not changed significantly compared to October 2017. This opinion is supported by the view repeated in the statement that "the current level of interest rates is conducive to keeping the Polish economy on the sustainable growth path and maintaining macroeconomic stability”.

NBP projection: gradual increase in inflation, slight slowdown of growth

The inflation and GDP paths in 2018, forecasted in the November projection, have - compared to the July projection - been slightly raised. The price dynamics expected in 2019 is also higher. In accordance with the projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 1.9% - 2.0% in 2017 (vs. 1.6% - 2.3% in the July projection), 1.6% - 2.9% in 2018 (vs. 1.1 - 2.9%), and 1.7% - 3.7% (vs. 1.3 - 3.6%). This means that, according to the projection, inflation will slightly exceed the MPC inflation target (2.5%) in 2019. In accordance with the November projection, GDP growth rate will run with 50% probability between 3.8% - 4.6% in 2017 (vs. 3.4 and 4.7% in the July projection), 2.8% - 4.5% in 2018 (vs. 2.5 - 4.5%), and 2.3% - 4.3% (vs. 2.3 - 4.3%). Thus, the projection paints a scenario of inflation gradually increasing amid slight slowdown of economic growth.

Lower mandatory reserve requirement rate

The MPC has lowered the rate of the mandatory reserve against funds obtained for at least two years from 3.5% to 0%. Present at the conference MPC member Ł. Hardt justified the decision by the need to align the burdens incurred by foreign and Polish entities due to the mandatory reserve requirement binding on banks. Under Article 38 of the NBP Act, the obligation of paying mandatory reserve is not applicable to funds obtained from abroad for at least 2 years. This means that funds obtained from domestic entities result in the obligation of the bank paying reserve.

In our view the MPC decision has no material impact on the shape of the monetary policy. Interest on the mandatory reserve (1.35%) is similar to interest on NBP bills (1.50%) used by the NBP to absorb banking sector's liquidity. In addition, the percentage of deposits with maturity above two years in the deposits of domestic entities excluding central government institutions is low (2.28% as at the end of September 2017). This means that the change in the mandatory reserve requirement rate will not substantially affect the incomes of banks and interest on deposits with maturity above 2 years.

The projection is not an argument in favour of hiking NBP rates

At the conference after the meeting, the NBP Governor, A. Glapiński repeated the view presented in recent months that NBP interest rates should stay at the current level until the end of 2018. In his view, the changes in the November projection compared to the July projection are minor and possible materialization of the projection scenario does not require a correction of the monetary policy. In his view, the current level of interest rates supports rebound in investments which though "budged” are limited by low level of innovation in companies. In addition, in the NBP Governor's opinion, competitive pressure is a factor which significantly restricts the pass-through from higher wages to prices of consumer goods. Present at the conference MPC member J. Żyżyński spoke along similar lines pointing to the absence of "excessive demand for credits”. In turn Ł. Hardt who shows a relatively high aversion to inflation stated that arguments in favour of rate hikes were not that strong currently to move for interest rate hikes.

Status quo in monetary policy

The above-quoted remarks of Council members indicate that despite slightly increased inflation and GDP paths in the November inflation projection, MPC bias in monetary policy has not substantially changed compared to the one presented after the October meeting. At the same time, they support our forecast of NBP rates, in which, given a moderate wage pressure and inflation staying below target, the MPC will leave interest rates unchanged until November 2018.

In our view, the statement after the MPC meeting and remarks of the NBP Governor are neutral for PLN and bond yields.