MPC continues fast normalization of monetary policy

Another surprisingly large increase in the interest rates

Today, the Monetary Policy Council has taken a decision to increase the interest rates once again. The NBP reference rate rose from 0.50% to 1.25%. This comes as yet another surprise after the MPC’s October’s decision to tighten the monetary policy given the scale of the rates increase, which was higher than expected, both by us and by the market. In the press release following the meeting, the Council has once again pointed to the supply-side factors, which are independent from the monetary policy, as the main reason behind the inflation rise. Like in October, the Council has once again referred to the additional factor stimulating inflation, namely the continuing economic recovery, including rising household income.

The Council maintains its opinion expressed last month, which says that there is a risk of inflation remaining elevated in the monetary policy transmission horizon amidst expected further economic recovery in Poland and favourable labour market conditions. The opinion suggests that the Council fears, like it was the case in October, that we might see secondary inflation impulses evoked by a strong growth in the prices of energy and agricultural commodities. Consequently, the Council has decided to tighten the monetary policy once again, aiming to decrease the inflation to the NBP target in the medium term.

November’s inflation projection as the key argument in favour of increasing the rates

According to the November projection of the NBP prepared on the assumption of unchanged NBP interest rates, there is a 50-percent probability that annual price growth will be in the range of 4.8-4.9% in 2021 (vs. 3.8–4.4% in the July 2021 projection), 5.1-6.5% in 2022 (vs. 2.5-4.1%) and 2.7-4.6% in 2023 (2.4-4.3%). This means that based on the projection in 2021-2023 annual average inflation will most likely run well above the MPC’s inflation target of 2.5%, and in 2023 it will come close to the upper limit for permissible deviations from the target (3.5%). Taking into consideration the results of research on the mechanism of transmission in the monetary policy, it can be assumed, taking into consideration the today's increase in the interest rates, that inflation in 2023 would be lower than expected in the projection, and it would be highly likely to fall below the upper limit for deviations from the MPC’s target (3.5%) in H2 2023. At the same time, GDP growth is projected to be, with a 50-percent probability, in the range of 4.9-5.8% in 2021 (vs. 4.1-5.8% in the July projection), 3.8-5.9% in 2022 (vs. 4.2–6.5%), and 3.8-6.1% in 2023 (4.1–6.5%). The inflation projection suggests that the years 2021-2023 will see economic growth close to 5%, which is in line with our expectations. Therefore, the macroeconomic scenario as seen in the November projection is that of elevated inflation accompanied by a moderately strong and stable economic growth. In our opinion, the scenario outlined in the projection, and the inflation in particular, which is unlikely to come back to a level well below the upper limit for deviations from the MPC’s target in 2023, was the main reason that made the Council tighten the monetary policy considerably.

Interest rate hikes to continue

At the press conference following the MPC’s meeting, the NBP President A. Glapiński declared that the MPC “will do everything within its powers to bring inflation back to the target" and did not rule out further interest rate hikes. He also confirmed that the inflation target is still to be interpreted as the band of 2.5% +/- 1 pp. He also noted that inflation as shown in the November projection will go slightly above 7% in January 2022, and then it will begin to fall in the following months. The short-term inflation scenario outlined by the NBP President is consistent with our forecast, but after the Friday publication of the flash estimate of inflation for October we see a significant upside risk to that scenario. Consequently, we expect that the monetary policy will keep on normalising in the months to come, and the interest rate hikes will continue. We will present our revised scenario for the monetary policy in the next MACROmap.

In our opinion, the press release following today’s meeting of the Council is positive for the PLN and for the yields on bonds.