Today, the Monetary Policy Council has taken a decision to increase the interest rates once again. The NBP reference rate rose from 6.50% to 6.75%. The 25-basis-point rate hike was consistent with the market consensus and our forecast. Today’s hike is the lowest since the beginning of the current monetary policy tightening cycle in October 2021. In our opinion, the main reason why the monetary policy was tightened again was inflation, which continued to rise strongly in August and, in accordance with the flash estimate, reached 16.1% YoY comparing to 15.6% in July (with core inflation estimated to have grown from 9.3% to 9.9%).

Press release still slightly dovish

The tone of the press release following the September’s MPC meeting has not changed much comparing to the one published in July. In the Council’s opinion, monthly data shows that the economic activity will slow down in the third quarter. The Council has repeated that “a further slowdown of GDP growth is forecast for the coming quarters, while the economic outlook is subject to significant uncertainty.” The Council has once again declared that “further decisions of the Council 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.” It is also worth noting that despite the increasing number of signals indicating at the growing probability of “gas shock” (disruptions in gas supplies from Russia to the EU countries) occurring in the months to come, the Council consistently remains silent about this risk factor for GDP growth in the coming quarters in its press releases (see MACROmap of 11/07/2022). In our opinion, the press release suggests that today’s decision of the MPC should not be interpreted as ending the monetary policy tightening cycle, and the doors are still open when it comes to further interest rate hikes.

MPC still focused on GDP growth in 2023

Today’s decision of the MPC reflects the reluctance to keep on tightening the monetary policy declared by the NBP President in his public statements despite persistently high inflation that is unlikely to go back to the inflation target in the monetary policy transmission horizon. The decision supports our opinion presented after the July’s MPC meeting, which says that the Council’s priority is to reduce the scale of economic slowdown in 2023. What also supports our opinion is that in the light of studies on transmission mechanism in the monetary policy the expected impact of a 25-basis-point hike on GDP growth and inflation in the medium term will be negligible.

Rate hikes to end in the fourth quarter

Given our short-term inflation forecast, in which the annual price growth rate will stay above 16% until December 2022, with inflation reaching its local peak at 17.5% in October (see MACROmap of 5/09/2022), we believe that the interest rate hikes cycle in Poland is not over yet. We expect that the macroeconomic data that will be published in September and October and will indicate at the economic growth slowing down increasingly amidst persistent, high inflation will make the Council raise the interest rates once again by 25bp in Q4 2022, and it will be the end of the monetary policy tightening cycle in Poland. Consequently, the target interest rate level may be lower than the market is currently expecting (7.25% for the NBP reference rate). This means that we can expect the PLN exchange rate to be increasingly volatile in the weeks to come. 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.

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