Monetary policy tightening coming ever closer to its end

Interest rate hike in line with expectations

Today, the Monetary Policy Council has taken a decision to increase the interest rates once again. The NBP reference rate rose from 5.25% to 6.00%. The 75-basis-point rate hike was consistent with the market consensus and our forecast.

In our opinion, the main reason behind the strong tightening of the monetary policy was the continuing, significant, stronger-than-expected inflation rise seen in May, which stood at 13.9% YoY vs. 12.4% in April according to the flash estimate. Also core inflation is estimated to have increased significantly, from 7.7% in April to 8.5% in May (see MACROmap of 06/06/2022). In this context, in today’s press release, apart from the supply-side factors that were boosting inflation, the Council also pointed to robust demand enabling the enterprises to pass rising costs on to the final prices.

In the decision-taking process regarding the monetary policy, the publication of data on real economy, which was indicative of a slowdown in economic activity, counterbalanced the data that suggested the growing inflation pressure. As opposed to May, today’s press release placed a greater emphasis on the slowdown. First of all, the Council pointed to economic conditions, which “deteriorated markedly in some emerging market economies, including in China”, and to a gradual slowdown in global growth. The MPC’s opinion on the economic activity in Poland was similar to the conclusion the Council had made in May: “Available data point to continuing favourable economic conditions in 2022 Q2, however, economic activity growth will decelerate."

Monetary policy tightening will soon come to its end

The press release after today’s meeting does not differ much from the one published last month. 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.” At the same time, just like in May, 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 fact that the statements cited above were repeated suggests that the monetary policy tightening cycle will be continued in the months to come.

The publication of results of the July inflation projection will be an important argument in favour of further interest rate hikes amid the expectations for the price growth path to be revised significantly upwards versus the March scenario. At the same time, it will indicate at a significant inflation target overshooting in a several-quarters horizon. We maintain our scenario, in which the MPC will raise interest rates by 50 bps in each of the two subsequent meetings, which means that the reference rate will reach 7.00% in Q3 2022, and then the monetary policy tightening will end. We expect the macroeconomic data that will be published in the months to come to show a gradual slowdown in the economic activity, and consumption and investments in particular (see MACROmap of 08/06/2022). Should this scenario materialise, the MPC members will be reluctant to keep tightening the monetary policy. Nonetheless, currently the Council believes that the scale of the slowdown in Poland will be limited.

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