Today, the Monetary Policy Council has taken a decision to increase the interest rates once again. The NBP reference rate rose from 4.50% to 5.25%. The 75-basis-point rate hike was not as strong as both us and the market had expected (100bps). In the press release after the meeting, the Council pointed to continuing high economic activity growth in Q1 2022, and noted that a continuation of favourable economic conditions may be expected in the coming quarters. Nonetheless, the Council believes the economic growth will slow down gradually. In the Council’s opinion, the Russian military aggression against Ukraine is a significant uncertainty factor that exerts its impact on both domestic and global outlook.

Supply and demand mix keeps boosting inflation

In our opinion, the main reason behind the strong tightening of the monetary policy was the continuing, significant, stronger-than-expected inflation rise seen in April, which stood at 12.3% YoY vs. 11.0% in March according to the flash estimate (see MACROmap of 02/05/2022). Consequently, with the prices expected to keep on growing in the months to come, inflation in Q2 2022 is likely to rise far beyond the NBP’s March projection (10.3%). The Council’s opinion of the reasons behind the historically-high inflation has not changed comparing to April. In the Council's assessment, the significantly elevated inflation is still driven up by high global energy commodity prices, earlier increases in regulated domestic tariffs on electricity, natural gas and thermal energy, and rising household incomes. Just as it was in April, the Council concluded that inflation will remain markedly elevated in the coming quarters due to a further impact of the factors currently amplifying price growth, including those related to the Russian military aggression against Ukraine.

MPC to complete rate hike cycle in the summer

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.” At the same time, just like in April, the Council emphasised that the interest rate hike will reduce the risk of inflation running above the NBP inflation target in the monetary policy transmission horizon. In our opinion, the fact that the statements cited above were repeated suggests that the monetary policy tightening cycle will be continued in the months to come. We also believe that today’s lower-than-expected rate hike strongly supports our conclusion, which says that the NBP reference rate hiking cycle is coming to an end. We maintain our forecast, in which the reference rate will be increased significantly in June and July (up to 6.50% in July; see MACROmap of 02/05/2022), but there will be no more rate hikes after that. A significant PLN depreciation that followed the publication of today’s MPC decision supports this scenario. We believe that further significant interest rate hikes are necessary to stimulate a significant PLN appreciation needed to reduce the inflationary pressure amidst the increased risk premium connected with the war in Ukraine and the uncertainty related to the date of launching the National Recovery Plan.

MPC wants to avoid high interest rate volatility in 2022-2023

We still believe that the Council, in its efforts to curb the economic activity fluctuations, will choose to keep the total scale of the additional NBP reference rate hikes on a moderate level, but the target rate will stay in force for quite a long time (at least until the end of Q3 2023 in accordance with our forecast). In our opinion, the alternative scenario in which the stronger tightening of the monetary policy in 2022 would be followed by earlier interest rate cuts in 2023 is less likely. Tomorrow’s press conference of the NBP President will probably shed more light on the reasons behind today’s lower-than-expected interest rate hike.

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

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