Inflation doubles the inflation target and rises on

Interest rates remain unchanged

As we expected, the Monetary Policy Council (MPC) has not changed interest rates at its meeting today (the reference rate is 0.10%). In accordance with its press release, the MPC expects economic activity to recover in the coming quarters, but the further development of the pandemic in Poland and abroad remains the main sour

Inflation highest in 20 years

According to final GUS data, Poland's CPI inflation rose to 5.5% YoY in August vs. 5.4% in July, running above the flash estimate by GUS and clearly above the market consensus (5.2%) and our forecast (5.1%). Thus, inflation reached its highest since June 2001, and was above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for five consecutive months.

Gas price rise as one of the reasons behind a strong inflation rise

Inflation was driven up by a stronger growth in prices in the “food and non-alcoholic beverages” category (3.9% YoY in August vs. 3.1% in July), which in turn was driven primarily by a stronger growth in the prices of fruit (resulting from a lower supply caused by unfavourable agro-meteorological conditions) and of meat (resulting from the last year's low base effect in the case of pork, and from a lower supply effect connected with losses caused by avian influenza in the case of poultry). A stronger growth in energy prices (6.6% YoY in August vs. 5.3% in July) caused by the August increase in gas prices also drove the inflation up. Core inflation, which we estimate to have risen from 3.7% in July to 4.0% YoY in August had also positive impact on inflation. Core inflation rose due to an increase in prices in many categories, e.g. “clothing and footwear” (due to a stronger growth in the prices of footwear), “communication” (mainly due to the growing prices of telephone and telefax services), “restaurants and hotels”, “miscellaneous goods and services” (caused by an increase in the prices of insurance products), “recreation and culture” (caused by an increase in the prices of culture-related services and package holidays abroad), “health” (among others, due to an increase in the prices of pharmaceutical products and dental services) and “alcoholic beverages and tobacco” (an effect of the rising prices of alcoholic beverages). Inflation was driven down by a slower growth in the prices of fuels (28.0% YoY in August vs. 30.0% in July) connected with the fading of the last year’s low base effects.

Core inflation rises due to pent-up demand

It is worth noting that core inflation is not declining despite strong high base effects associated with the wave of COVID increases in the first phase of the pandemic. Like in the preceding month, the structure of the core inflation data indicates that this is due to the realisation of pent-up demand in sectors of the economy that were frozen in the previous months, which is pro-inflationary in a supply-constrained environment (see MACROpulse of 13/08/2021). This effect is particularly strongly visible in the “recreation and culture”, “restaurants and hotels” and “clothing and footwear" categories.

Interest rates to remain unchanged despite high inflation

Today's data indicates a significant upside risk to our 2021 inflation scenario (4.4% YoY vs. 3.4% in 2020). Nonetheless, we maintain our scenario in which the MPC will not change interest rates until the end of 2022, and the reference rate will be raised for the first time in January 2023 (from 0.10% to 0.25%; see MACROpulse of 08/09/2021).

In our opinion, today’s data on inflation are slightly positive for the PLN and the yields on Polish bonds.

In accordance with the press release, the NBP is going to continue to purchase government securities and government-guaranteed debt securities in the secondary market as part of the structural open market operations (the value of bonds purchased so far is PLN 141.3bn).

MPC’s approach consistent with NBP President's recent statements

When assessing short-term inflation prospects, the MPC pointed out, just like in July, numerous supply-related factors, such as growing fuel, food or electricity prices and waste disposal charges which, while being independent from the domestic monetary policy, would translate into inflation staying above the upper band for deviations from the inflation target (2.5% +/- 1 p.p.). In the MPC’s opinion, growing costs of running business amidst the pandemic caused by higher international transport charges and temporary disruptions in supply chains keep on adding to inflation. The MPC believes that the fading of some of those factors next year will drive inflation down.

The press release continues to include comments indicating that the likelihood of interest rate hikes in the coming months is low. Firstly, when emphasising the supply-related nature of inflation rise in Poland, the Council once again quoted a passage of the Monetary Policy Guidelines for 2021, which reads that “due to the macroeconomic and financial shocks, inflation may temporarily deviate from the target and even run outside the band for deviations from the target” and “the response of monetary policy to the shocks is flexible and depends on their causes and the assessment of persistence of their effects, including their impact on inflation developments.” Secondly, the Council once again included the passage from the comment reading that the NBP’s monetary policy “stabilises inflation at the level consistent with the NBP’s inflation target in the medium term.” In our opinion, this means that the Council still expects the inflation to return close to the target set by the MPC in the mid-term horizon, and that it is not necessary to tighten the monetary policy at the moment. Thirdly, the continuation of structural open-market operations suggests that in the MPC’s opinion even a small adjustment to the unconventional monetary policy preceding possible interest rate hikes would be unjustified at the moment.

The press release following today’s meeting of the Council suggests that the Council's approach to the monetary policy is consistent with the NBP President’s Monday statements. He emphasised that elevated inflation is mostly driven up by factors that are beyond the MPC’s control. He also noted that if the subsequent waves of the pandemic have no big negative impact on the economy, the rate of economic growth remains high, the situation in the labour market remains favourable and forecasts point to inflation hovering permanently above the NBP target, then it will be justified to withdraw the monetary accommodation. Furthermore, in his opinion, an appreciation of the zloty would not seem beneficial to the economy at the moment, which we believe should be interpreted as another strong argument in favour of interest rates stabilisation in the months to come.

Interest rate hikes still far-off

The MPC’s statement following its meeting shows that the MPC intends to keep stable interest rates for quite some time despite elevated inflation expected in the coming months. We maintain our scenario, in which the MPC will not change interest rates by the end of 2022. We believe that if, in line with our scenario, inflation forecasted in the NBP’s November projection falls to around 3% in H2 2022, then the majority of Council members will be reluctant to tighten the monetary policy. We expect the reference rate to be raised for the first time, from 0.10% to 0.25%, in January 2023. We still see the risk of materialisation of a scenario in which stronger wage and inflationary pressure, and consequently a slower return of inflation towards the target in 2022, would prompt the MPC to start interest rate hikes

in H1 2022, after the fourth wave of the pandemic has come to an end.