The MPC wants to support GDP growth despite overheated economy

Interest rates increased again as expected

Today, the Monetary Policy Council has taken a decision to increase the interest rates once again. The NBP reference rate rose from 1.25% to 1.75%. The scale of the increase was consistent with market consensus and our forecast. 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 November, the Council has once again referred to the additional factor stimulating inflation, namely the continuing economic recovery, including rising household income. In the Council’s opinion, “inflation is going to remain at an elevated level also in the coming period”, and the so-called Anti-inflationary Shield will have a curbing impact on inflation. In a longer perspective, the Council expects the inflation to decrease, which will be supported by expected fading of some of global shocks currently boosting price growth as well as by the increase in the interest rates carried out by the NBP so far.

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 and November, that we might see secondary inflation impulses evoked by a strong growth in the prices of energy and agricultural commodities. In the Council’s opinion, the increase of the NBP interest rates will also curb inflation expectations, which is a new argument favouring higher interest rates comparing to the press releases published after the meetings in October and November. 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.

The MPC wants to support GDP growth despite overheated economy

In its press release following the meeting, the Council announced that its “decisions in the coming months will continue to be aimed at reducing inflation to a level consistent with the NBP inflation target in the medium term, while taking into account economic conditions, so as to ensure medium-term price stability and at the same time support sustainable economic growth after the global pandemic shock.” Furthermore, the Council made the monetary policy tightening scale contingent on the “incoming information on perspectives for inflation and economic growth, including situation in the labour market.” On the one hand, the passages quoted above suggest that the MPC is ready to keep on gradually tightening the monetary policy. It is also worth emphasising that the press release that followed the MPC meeting in November did not contain any statements that would explicitly show the MPC's readiness to keep on raising the interest rates. On the other hand, the MPC announcing that, “at the same time", it is ready to support economic growth, with wage and inflation pressure increasing and inflation unlikely to return to the inflation target in a short-term perspective, indicates that the MPC is ready to accept inflation staying above the inflation target for a longer period of time. In other words, we believe that the passages quoted above can be interpreted as the return of the inflation to the MPC's target in the medium term no longer being a top priority of the monetary policy.

We expect the rates to be raised again in January

The press release following the MPC meeting supports our scenario, in which the monetary policy will continue to be normalised in January. We maintain our forecast, in which the MPC will raise the NBP reference rate by 50 bps in January 2022, and stop increasing interest rates afterwards. Tomorrow’s press conference of the NBP President will shed more light on the monetary policy perspectives.

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