Interest rates unchanged despite the expected rise in inflation

Today, the Monetary Policy Council has taken a decision to keep interest rates unchanged (with the NBP reference rate standing at 6.75%). The Council’s decision was consistent with market consensus and our forecast. Statements made by the NBP Governor and some of the MPC members, which suggested that they were reluctant to tighten the monetary policy despite high, persistent inflation, indicated that the rates were highly likely to remain unchanged. In the press release after the meeting, the Council noted that “in final months of 2022, commodity prices and producer price growth declined, and disruptions in global value chains were markedly less acute than earlier, which together with the expected economic slowdown, will support a gradual easing of consumer price dynamics.” The passage indicating that “the weakening of the external economic conditions, together with monetary policy tightening by major central banks will curb global inflation and commodity prices” and that “the deterioration of global economic conditions also hampers GDP growth in Poland” was kept in the text of the release. Like in January, also this time the Council concluded that “given strength and persistence of the recent shocks that remain beyond the impact of domestic monetary policy, in the short term inflation will remain high, and its return to the NBP inflation target will be gradual.” The Council has once again declared that its “further decisions (…) 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.”

Though formally left open, the hiking cycle is in fact closed

The absence of significant changes between the January and February press releases, and the forecast maintained in the current release, which assumes that inflation will keep on growing without any reaction from the monetary policy indicate that high inflation is still of secondary importance to the Council, and that preventing the economic growth from slowing down too much in the quarters to come remains the main objective of the monetary policy. Although the Council has not formally closed the monetary policy tightening cycle, we are of the opinion that the Council is unlikely to go back to raising the interest rates again in the months to come. Our conclusion is supported by the NBP Governor’s statement made at the conference following the January meeting, saying the NBP believed inflation would reach a single-digit level at the end of the year (see MACROmap of 09/01/2023).

High and growing inflation overshadowed by slowdown in economic growth

Today’s fifth consecutive MPC’s decision to keep the interest rates unchanged reflects the reluctance to keep on tightening the monetary policy that was declared by the NBP President and some MPC members in their public statements despite persisting, high inflation that is unlikely to go back to the inflation target in 2024, i.e. in the monetary policy transmission horizon. This decision is consistent with our forecast, in which the NBP interest rates will not change until the end of 2023, even though we expect inflation to rise temporarily to 18.8% YoY in February, which will be followed by a quick decline to approx. 7.1% in December 2023. This is because inflation rise in Q1 2023 will be accompanied by further GDP growth slowdown to -0.8% YoY vs. 2.4% in Q4 2022, and MPC will see those trends as an argument in favour of keeping interest rates unchanged. Tomorrow’s press conference of the NBP President will tell us more about the short-term outlook for interest rates.

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