RPP maintains the rhythm of interest rate hikes

Today, the Monetary Policy Council has taken a decision to increase the interest rates once again. The NBP reference rate rose from 1.75% to 2.25%. The scale of the increase was consistent with market consensus and our forecast. Another 50bp rate hike - after the December one - indicates that the MPC prefers to gradually adjust the monetary policy rather than tighten it radically in a short period of time. In the press release following the meeting, the Council maintained its assessment that supply-side factors (increases in the prices of raw materials and CO2 emission allowances, pandemic-related disruptions to supply chains and earlier increases in electricity prices and waste disposal fees) were the main causes of higher inflation. Like in the previous months, the Council once again referred to the additional factor stimulating inflation, namely the continuing economic recovery, including rising household income. In the Council's view, inflation, pushed up by increases in electricity, gas and heating tariffs, will remain at an elevated level also in 2022, with the so-called Anti-Inflationary Shield having a curbing impact on it. 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 inflation scenario outlined in the press release is in line with the latest inflation forecast presented by the NBP President last week, which takes into account the impact of the Anti-Inflationary Shield, the strong increase in gas and electricity prices in January 2022 and the expected reduction of VAT on food. According to this forecast, average annual inflation in 2022 will reach 7.6% compared to 5.1% in 2021, annual price growth rate will peak in June 2022 (8.3%) and will then gradually decline to 6.2% in December 2022. Although the average annual price growth rate expected by the NBP is close to our revised forecast (7.4%), the inflation peak comes later and the expected inflation in December this year is clearly higher than in our scenario (see MACROmap of 3/1/2022).

The door to further hikes still open

In the opinion of the Council, the expected further economic recovery in Poland, favourable situation on the labour market as well as the "likely longer impact of external shocks on price growth" point to a persistent risk of inflation exceeding the NBP inflation target within the monetary policy transmission horizon. It means that the Council still fears that we might see secondary inflation impulses evoked by a strong growth in the prices of commodities. The press release also reiterates the argumentation presented after the December meeting that the increase of interest rates will also curb inflation expectations. 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 Council maintained the declaration 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.” The Council, as in December, made the monetary policy tightening scale contingent on the “incoming information on perspectives for inflation and economic growth, including situation in the labour market.” We maintain our assessment that the quoted statements signal a readiness for further and gradual monetary policy tightening and the MPC's acceptance of a prolonged persistence of inflation above the inflation target (see MACROpulse of 8/12/2021).

We expect the rates to be raised again in February

The press release following the MPC meeting supports our scenario of further monetary tightening in February. According to our revised forecast, the MPC will raise the NBP reference rate by 50 bps and 25 bps in February and March 2022 respectively, 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 announcement following today’s meeting of the Council will be neutral for the PLN and for the yields of bonds.