MPC continues economic growth focus

Interest rates remain unchanged

Yesterday, 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 likely further drop in inflation in December, which, according to our forecast and the market consensus, fell to 17.3% YoY vs. 17.5 and 17.9% in October and November, respectively, were indicative of a high probability of interest rate stabilisation. The GUS will release its flash inflation data for December today.

Council continues economic growth focus

In the press release following the meeting, the MPC noted that the latest macroeconomic data signalled “a further slowdown of GDP growth in Q4 2022, 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 “the global economic slowdown will contribute to stifling Poland’s economic growth”. As in December, 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”. In the opinion of the Council, the decline in PPI inflation in recent months signals that “cost pressures affecting consumer prices are potentially subsiding”. 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 January and December 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. As in the previous months, the wording of the press release suggests that the Council has not ended the monetary policy tightening cycle. However, we continue to believe that the probability of the MPC returning to a rate hike cycle in the coming months remains low. This assessment is supported by the statement made by the NBP President at the press conference following the December meeting, where he made it clear that the MPC was trying to suppress inflation as soon as possible but, at the same time, wanted to avoid putting excessive brakes on economic activity (see MACROmap of 12/12/2022).

In Q1, inflation will increase, GDP decrease and interest rates will remain stable

Yesterday’s fourth 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, despite the temporary increase in inflation in 2023 Q1 that we forecast, spurred by changes to the Inflation Shield (increase in VAT rates for district heating, gas, electricity and fuels). Our interest rate forecast is supported by the stabilisation of fuel prices recorded in the first days of January despite the increase in the VAT rate. This signals a reduced probability of the inflation peak expected by us in February 2023 exceeding 20% YoY. Moreover, in our opinion, the likelihood of a scenario in which a rise in inflation in Q1 will trigger substantially increased wage demands and the associated secondary inflationary effects is limited. An important argument supporting this assessment is the historically low percentage of employed persons looking to switch jobs or searching for additional work (for more details on this issue, read the upcoming MACROmap). In our opinion, most Council members share our view on the risk of a wage-price spiral occurring. Therefore, they will be reluctant to raise interest rates in response to the increase in inflation in 2023 Q1, which will be mainly driven by supply factors and last year’s low base effects, and, most likely, will only be temporary. Rising inflation will be accompanied by a strong decline in annual GDP growth in Q1 into negative territory (-1.0% YoY), which will be an additional argument for the Council not to raise interest rates. The NBP President’s conference scheduled for today will shed more light on the short-term outlook for interest rates.

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