A pause in the interest rate hiking cycle

Interest rates remain unchanged

Today, the Monetary Policy Council has taken a surprising decision to keep interest rates unchanged (with the NBP reference rate staying at 6.75%). We were expecting the interest rates to be raised by 25bps, and this forecast was consistent with the market consensus. Statements expressed by some MPC members, including the NBP President, in the last couple of weeks were indicative of a high probability of interest rate stabilisation. However, the publication of preliminary data showing surprisingly high inflation in September (17.2% YoY vs. 16.1%) and a strong growth in core inflation combined with better-than-expected data on economic activity in the third quarter made us decide to keep our forecast of interest rates going up in today’s meeting unchanged.

Doors are still open for another interest rate hike

The tone of the press release following the October’s MPC meeting has not changed much comparing to the one published in September. In the Council’s opinion, monthly data shows that the annualised GDP growth will slow down in the third quarter. The Council has repeated that “a further slowdown of GDP growth is forecast for the coming quarters, while the economic outlook is subject to significant uncertainty.” The Council has once again declared that “further decisions of the Council will depend on incoming information regarding perspectives for inflation and economic activity, including the impact of the Russian military aggression against Ukraine on the Polish economy.” In our opinion, particularly noteworthy is the Council’s conclusion on the inflation outlook, which says that “given strength and persistence of the current shocks that remain beyond the impact of domestic monetary policy, a return of inflation towards the NBP inflation target will be gradual.” This means that the Council has adjusted the statement expressed in its press release following the September meeting, which said that a gradual decline in inflation would take place “in the coming years” without making any reference to the inflation target. In our opinion, the said adjustment should not be interpreted as a signal that would indicate that the inflation is expected to return to the target in the monetary policy transmission horizon. We believe that if the Council considered the return to be the most likely scenario, it would have been stated unambiguously in the press release. Henceforth, in our opinion, the press release suggests that today’s decision of the MPC should not be interpreted as ending the monetary policy tightening cycle. The doors are still open for another interest rate hike.

Today’s decision of the MPC reflects the reluctance to keep on tightening the monetary policy declared by the NBP President and some MPC members in their public statements despite persistent and high inflation that is unlikely to go back to the inflation target in the monetary policy transmission horizon. However, we believe that further, significant inflation growth that we expect to take place in the coming months, resulting from the combined impact of growth in energy prices, their second-round inflation effects, and loose monetary (including PLN depreciation) and fiscal policy, will make the Council raise interest rates once again in November. This scenario is supported by data published by the GUS today, which showed that the GDP growth in 2021 was significantly stronger. The data indicates that the positive output gap and the related inflation pressure may persist longer than we expected, which will increase the price dynamics expected in the inflation projection that is to be published by the NBP in November. We continue to believe that the monetary policy tightening cycle will come to its end in Q4 2022. Consequently, the target interest rate level may be lower than the market is currently expecting (7.50% for the NBP reference rate). This means that we can expect the PLN exchange rate to be increasingly volatile in the weeks to come. Tomorrow’s press conference of the NBP President will tell us more about the short-term outlook for interest rates.

We will present our revised macroeconomic scenario including the interest rates forecast in the next MACROmap.

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