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The MPC sends strong dovish signals

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 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 May 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 a further improvement in economic situation, which however remains diversified across sectors.

In accordance with the most recent 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 133.8bn).

The MPC has once again pointed to the supply-related nature of the inflation rise

Like in the previous month, also this time the Council pointed to numerous supply-related factors when assessing short-term inflation perspectives, namely growing prices of fuels, food and electricity as well as waste disposal charges. The Council emphasised that these factors were independent from the domestic monetary policy, and that they will translate into inflation staying above the upper band for deviations from the inflation target (2.5% +/- 1 p.p.). In the Council’s opinion, the 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. In the MPC’s opinion, when the factors referred to above fade, this will drive the inflation down next year, and the “sources and the expected temporary nature of inflation exceeding the NBP’s target” as well as the “uncertainty about the persistence and scale of the economic recovery” support the status quo in the monetary policy. The scenario involving an elevated inflation caused mainly by supply-related factors in the months to come is consistent with our most recent projection (see MACROmap of 07/06/2021). It suggests that having reached its local peak (4.8%) in May 2021, the annual inflation will begin to fall slightly, but it will remain above 4% until January 2022. According to our scenario, inflation will come close to the inflation target (2.8%) in April 2022.

The MPC sends strong dovish signals

The press release also contains new passages, which indicate that the probability of raising interest rates in the months to come is low. First of all, when emphasising the supply-related nature of inflation rise in Poland, the Council has 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.” In our opinion, that this passage has been quoted is clearly indicative of the Council’s reluctance to raise the rates in response to the significant inflation rise seen over the last couple of months. Secondly, the Council has put a passage removed from the last month’s press release back in the present release, the passage 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 expects the inflation to return close to the target set by the MPC in the mid-term perspective, and that it is not necessary to tighten the monetary policy at the moment. Thirdly, the continuation of structural open-market operations announced in the press release suggests that in the Council’s opinion even a small adjustment to the unconventional monetary policy preceding a potential raising of interest rates would be unjustified at the moment.

Warning shot still possible but less likely

The assessment presented by the MPC leads to a conclusion that the Council intends to keep interest rates on a stable level even though the inflation is expected to stay on a higher level for a longer period of time. Therefore, the text of the press release is consistent with May’s statements of the NBP President, which indicated that the probability of raising interest rates earlier than in mid-2022 was low. 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 still is a risk that the scenario in which the MPC decides to raise interest rates slightly on a one-off basis in July 2021 in order to anchor the inflation expectations in reply to a significant increase in inflation suggested by the July projection can materialise. However, this is not our base scenario. What is more, a clearly dovish tone of today’s press release following the MPC meeting suggests that the probability of a “warning shot” scenario in the monetary policy is lower than it was last May.

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