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Another surprisingly huge interest rate hike

Today, the Monetary Policy Council has taken a decision to increase the interest rates once again. The NBP reference rate rose from 3.50% to 4.50%. The 100-basis-point rate hike was stronger than both us and the market had expected (50bps). This means that, just like in March 2022, the interest rate adjustment was bigger than expected (see MACROpulse of 08/03/2022). In its press release after the meeting the Council noted that Russian military aggression against Ukraine constitutes a significant uncertainty factor and it has contributed to weakening sentiment of economic entities. At the same time, the Council has repeated its optimistic statement expressed after the March meeting, which said that a continuation of favourable domestic economic conditions may be expected in the coming quarters given a modest share of exports to Russia and Ukraine in Polish foreign sales.

Inflation rises beyond the March projection

The press release does not explain why the interest rate hike was much higher than expected. In our opinion, the main reason behind this relatively strong tightening of the monetary policy was the significant inflation rise seen in March, which stood at 10.9% YoY vs. 8.5% in February according to the flash estimate (see MACROmap of 04/04/2022). Consequently, with the prices expected to keep on growing strongly in the months to come, inflation in Q2 2022 is likely to rise far beyond the NBP’s March projection (10.3%). The Council may have concluded that the quick inflation rise and the related risk of inflation expectations hike requires relatively big monetary policy adjustment even though the price growth acceleration was mainly caused by the supply-side factors (a strong growth in the prices of food and energy) that are strongly related to the war in Ukraine. Tomorrow’s press conference of the NBP President will probably shed more light on the reasons behind today’s surprisingly high interest rate hike.

The end of the interest rate hikes coming ever closer

The Council has 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.” At the same time, just like in March, the Council emphasised that the interest rate hike will reduce the risk of inflation running above the NBP inflation target in the monetary policy transmission horizon. In our opinion, the press release suggests that the monetary policy tightening cycle will be continued in the months to come. We also believe that today’s much-higher-than-expected interest rate hike is indicative of a slight upside risk to the expected peak of the NBP reference rate adjustment which, according to our recent forecast, is 5.50% (see MACROmap of 04/04/2022). In our scenario, the Council, in its efforts to curb the economic activity fluctuations, will choose to keep the total scale of the NBP reference rate hikes on a moderate level, but the target rate will stay in force for quite a long time (at least until the end of 2023 in accordance with our forecast). In our opinion, the alternative scenario in which the stronger tightening of the monetary policy in 2022 would be followed by interest rate cuts in 2023 is less likely.

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