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MPC patiently waiting for inflation to peak

Interest rates remain unchanged

Today, the Monetary Policy Council decided to keep interest rates unchanged (with the NBP reference rate staying at 6.75%) The MPC’s decision is consistent with our forecast and the market consensus. Statements made by some MPC members in the last couple of weeks, signalling a reluctance to tighten the monetary policy, as well as the publication of flash inflation data showing its surprising and substantial drop in November (to 17.4% YoY vs. 17.9% in October), were indicative of a high probability of interest rate stabilisation. The press release issued after the meeting noted the decline in consumer and producer inflation observed recently in Poland and other economies.

Door to hikes remain open. but...

In the press release following the meeting, the MPC reiterated its assessment that the latest macroeconomic data signalled “a further slowdown of GDP growth, while the economic outlook is subject to significant uncertainty”. The Council also repeated the fragment indicating that “the anticipated downturn in other economies along with a monetary tightening pursued by key central banks will have a limiting effect on global inflation and commodity prices” and “will contribute to stifling Poland’s economic growth”. As in November, the MPC concluded that “given the strength and persistence of the current shocks that remain beyond the impact of the domestic monetary policy, in the short term inflation will remain high, and its return towards the NBP inflation target will be gradual”. The Council reiterated that its “further decisions (…) will depend on incoming information relevant to inflation and economic activity, including the impact of Russia’s military aggression against Ukraine on the Polish economy”.

Thus, there were no major changes between the December and November press releases, which indicates that high inflation continues to be of secondary importance for the Council and that its primary objective is to prevent an excessive economic slowdown in the coming quarters. Although the wording of the press release suggests that the Council has not ended the monetary tightening cycle yet, the probability of the MPC hiking rates in the coming months remains low. This assessment is strongly supported by the fact that December was the third month in a row in which the MPC elected not to raise rates despite persistently high CPI inflation, a continued rise of core inflation (excluding food and energy prices) in November which we estimate at 11.3% YoY (the highest level since January 1999), and the November inflation projection indicating that inflation will return close to the Council’s inflation target (2.5%) as late as in H2 2025.

Stabilisation of interest rates in 2023

Today’s third consecutive decision of the MPC to keep interest rates unchanged is consistent with the reluctance to keep tightening the monetary policy expressed in public statements by the NBP President and some Council members despite the persistent and high inflation that is unlikely to go back to the inflation target in the monetary policy transmission horizon. This move is consistent with our forecast, according to which NBP interest rates will remain stable until the end of 2023. We stand by our assessment that the sharp slowdown in economic growth forecasted by us in the coming quarters, in particular the temporarily negative annual GDP growth we expect in Q1 2023, will be a key argument for the Council not to raise interest rates in the coming months. This assessment is not affected by the changes to the Inflation Shield announced by the government in recent days (increased VAT rates for district heating, gas, electricity and fuels), contributing to higher inflation in 2023. The Council will most likely conclude that the increase in inflation attributable to these changes is caused by supply factors (which does necessitate a monetary policy reaction), and the associated faster decline in wages in real terms will be a factor curbing inflationary pressures in the long run. The NBP President’s conference scheduled for tomorrow will shed more light on the short-term outlook for interest rates.

In our opinion, the wording of the press release following today’s MPC meeting is neutral for the PLN exchange rate and yields on bonds.