MPC ready for a temporary rise in inflation

As we expected, the Monetary Policy Council (MPC) has not changed interest rates at its meeting today (the reference rate is 0.10%). In accordance with the press release, the MPC still expects the economic activity to recover in 2021, but further development of the pandemic-related situation in Poland and abroad remains the main cause of uncertainty with regard to the scale and pace of the recovery. Like in March this year, also the present press release emphasised a positive impact of measures taken as part of the economic policy, including the easing of the monetary policy, on the economic activity. The MPC also noted a negative impact of worsening of the epidemic situation in March and tightening of the pandemic-related restrictions on the economic activity and sentiment in some sectors, but in the Council’s opinion, the impact has been “significantly weaker than before”.

Assessing short-term inflation prospects, the Council pointed to statistical base effects and expected increases in waste disposal charges as factors that will translate into a rise in inflation in the coming months. In the Council’s opinion, a progress in the vaccine rollout and a gradual pacing out of the pandemic will be driving the pressure on the increase in companies' operating costs down, thus curbing the inflation pressure.

In accordance with the press release, the NBP is going to continue to purchase government securities and government-guaranteed debt securities on the secondary market as part of the structural open market operations (the value of bonds purchased so far is PLN 113.4bn).

In MPC’s opinion, PLN no longer curbs the economic recovery

With the PLN weakening significantly in March, the Council gave up its opinion reflected in press releases since June 2020, in which “the lack of a visible and more durable zloty exchange rate adjustment to the global pandemic shock and to the monetary policy easing introduced by NBP” could slow the economic recovery in Poland down. The passage referred to above was replaced with a neutral, non-controversial statement (”The pace of the economic recovery in Poland will also depend on further developments of the zloty exchange rate”). We are interpreting this change as a signal of the Council becoming more approving of the current PLN exchange rate on the one hand, and indicative of the MPC’s invariably low tolerance to the prospect of quick PLN appreciation in the months to come (i.e. at the early stage of the economic recovery) on the other hand. This opinion is supported by the statement on the exchange rate policy that the MPC has once again published in the press release: “In order to strengthen the impact of the NBP’s monetary policy easing on the economy, the NBP may also intervene in the foreign exchange market. The timing and scale of the measures taken by the NBP will depend on the market conditions.”

Interest rates rise still far in the future

The scenario involving a temporary inflation rise caused mainly by supply-side factors in the months to come, which has been signalled by the Council in its press release, is consistent with our forecast (see MACROmap of 29/03/2021). In our opinion, the Council has outlined this scenario to anchor the rate hike expectations, which may start to grow along with rise in current inflation. Therefore, the text of the press release is consistent with the NBP President’s statements from March, which were indicative of interest rates being highly unlikely to rise before the end of 2022. At the same time, the MPC’s moderately optimistic opinion concerning the impact of the pandemic on economic activity referred to above indicates that the monetary policy will not be eased further despite the third wave of the coronavirus pandemic, which is currently seen in Poland.

We maintain our scenario, in which the MPC will not change interest rates by the end of 2022. We expect the reference rate to be raised for the first time in Q1 2023 (from 0.10% to 0.25%). In accordance with that scenario, the MPC will be tolerating potential upward deviations of inflation from the target in 2021-2022 as it will want to avoid a strong appreciation of the PLN as a result of rising interest rate differential between Poland and the Eurozone. Our mid-term NBP reference rate forecast is consistent with the expected course of the monetary policy of the European Central Bank, whose balance sheet total, though expected to stabilise in 2022, will fall significantly in early 2023.

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

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