MPC still expects a drop in inflation in 2022

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 source of uncertainty about the scale and pace of recovery. In this context, the Council has noted that the pandemic situation around the world has worsened as the Delta variant of the coronavirus spread. Like in July, the present press release also emphasises a positive impact of economic policy measures taken, including the easing of the monetary policy, on economic activity, which in the MPC’s opinion will also be supported by global economic recovery. The press release continues to include comments about the importance of PLN exchange rates for economic prospects (“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 foreign exchange 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 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.