A band instead of a point inflation target
MPC statement unchanged
As we expected, the Monetary Policy Council has left interest rates unchanged today (the reference rate amounts to 1.50%). In the statement after the meeting, the Council repeated the view that "the current level of interest rates is conducive to keeping the Polish economy on a sustainable growth path and maintaining macroeconomic stability”. The MPC also said that "current information point to a favourable outlook for economic activity growth in Poland, despite the expected slowdown in GDP growth in the coming years” and "in line with the available forecasts, inflation will remain close to the target in the monetary policy transmission horizon.”
NBP Governor: we have a band target
At the conference after the MPC meeting, A. Glapiński repeated the view that NBP interest rates are likely to remain unchanged until the end of 2019. He said at the same time that in assessing the rates outlook "he wouldn't like to be forward looking to 2020”. The NBP Governor's remark concerning the MPC inflation target is especially noteworthy. In his view, this target is a band target (1.5% - 3.5%) and not a point target (2.5% +/- 1 percentage point). We believe that this remark is of a groundbreaking nature from the point of view of the MPC communication, because it means departing from how the target was understood by the previous Monetary Policy Councils. It can be interpreted as tolerance for inflation persistently staying above 2.5% but below 3.5%, which means less room for interest rates hikes in the medium term.
Today's remarks of A. Glapiński are consistent with our scenario, in which NBP interest rates will remain unchanged until the end of 2019 (first hike by 25 bp in March 2020). Current market expectations point to first interest rate hike in Q4 2019.
Purchase of bonds of armament companies within the scope of NBP tools
As we expected, one of the topics raised at the conference was a possibility of the MPC using unconventional monetary policy tools. The NBP Governor informed that the MPC had studied the experiences of central banks conducting such policy (including those of the ECB and the National Bank of Hungary). According to A. Glapiński, these tools fall within the scope of the set of NBP instruments discussed in the Monetary Policy Guidelines for 2019 (these tools include the purchase of bonds of armament companies considered by MPC member J. Kropiwnicki – see MACROmap of 1/10/2018). These instruments may be used in a period of economic slowdown. In our view, the prospect of the MPC using such tools is still distant. However, we believe that in the conditions of a considerable slowdown of growth the Council will opt for unconventional policy and will leave the reference rate at the current level (1.50%).
Enterprises will cope with higher prices of electricity
The problem of the rise in the prices of energy (petroleum and electricity) has also been raised at the conference. The NBP Governor emphasized that the Council saw the risk of increase in inflation due to higher prices of these media; however, it will have a limited impact on inflation. According to A. Glapiński, the impact of higher electricity prices on the financial situation of enterprises will be limited due to their high competitiveness supported by low costs of labour. We will discuss the impact of higher electricity prices on the financial situation of enterprises at greater length in the next MACROmap.
In our view, today's remarks of the NBP Governor are slightly negative for PLN and bond yields.