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MPC focused on future inflation rather than present

Interest rates remain unchanged. MPC expects economic recovery

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 the press release, the MPC expects the economic activity to recover in the quarters to come, but further development of the pandemic-related situation in Poland and abroad remains the main cause of uncertainty with regard to the scale and pace of the recovery. Like in April this year, also the present press release emphasised a positive impact of measures taken as part of the economic policy, including the easing of the monetary policy, on the economic activity, which in the Council’s opinion will also be supported by global economic recovery. In the MPC’s opinion, incoming data are indicative of an improvement in economic situation, which however remains strongly diversified across sectors.

In accordance with the press release, the earlier messages still apply with regard to the significance of the PLN rate for the economic growth outlook (“the pace of the economic recovery in Poland will also depend on further developments of the zloty exchange rate”) and the NBP’s readiness to intervene in the currency market (“in order to strengthen the impact of the NBP’s monetary policy easing on the economy, the NBP may also intervene in the foreign exchange market. The timing and scale of the measures taken by the NBP will depend on the market conditions”).

In accordance with the press release, the NBP is going to continue to purchase government securities and government-guaranteed debt securities on the secondary market as part of the structural open market operations (the value of bonds purchased so far is PLN 123.8bn).

MPC focused on future inflation rather than present

Assessing short-term inflation perspectives, the Council pointed to numerous supply-related factors (growing prices of fuels, food and electricity as well as waste disposal charges) which will translate into inflation staying above the upper band for deviations from the inflation target (2.5% +/- 1 p.p.), emphasising that they are independent from the domestic monetary policy. In the Council’s opinion, also the growing costs of running business amidst the pandemic caused by higher transport charges and temporary disruptions in supply chains also add to inflation. In the Council’s opinion, when the factors referred to above fade, this will drive the inflation down next year.

The scenario involving a temporary inflation rise caused mainly by supply-related factors in the months to come, which has been signalled by the Council in its press release, is consistent with our most recent projection. It shows that the annual inflation will rise to slightly below 5% in May 2021, and then will begin to fall slowly towards the band for admissible deviations from the inflation target. In accordance with our projection, the inflation will fall within the band for admissible deviations from the target set by the MPC only in February 2022 (see MACROmap of 4/5/2021). Furthermore, in accordance with our projection, inflation will run markedly above the level expected by the NBP in its March projection both in Q2 and in the remaining quarters of 2021. The assessment presented by the Council leads to a conclusion that the Council intends to keep interest rates on a stable level even though the inflation is expected to rise and continue to stay on a higher level for a longer period of time. Therefore, the text of the press release is consistent with the NBP President’s statements from April, which were indicative of interest rates being highly unlikely to rise before the end of 2022.

Warning shot in June possible but unlikely

We maintain our scenario, in which the MPC will not change interest rates by the end of 2022. We expect the reference rate to be raised for the first time in Q1 2023 (from 0.10% to 0.25%). In accordance with that scenario, the MPC will be tolerating potential upward deviations of inflation from the target in 2021-2022 as it will want to avoid a strong appreciation of the PLN as a result of the interest rate differential between Poland and the Eurozone. In our opinion, there is a risk that the scenario in which the MPC decides to raise interest rates slightly on a one-off basis in June 2021 in order to anchor the inflation expectations in reply to a significant increase in inflation can materialise. However, this is not our base scenario.

In our opinion, the press release following today’s meeting of the Council is slightly negative for the PLN and for the bond yields.