Interest rate hike lower than expected
Today, the Monetary Policy Council decided to raise interest rates once again, as it hiked the NBP reference rate from 6.00% to 6.50%. The 50bp move was below the market’s and our predictions (both forecasting a 75bp raise) and lower than the hikes introduced by the Council at the four previous meetings. In our opinion, the driving factor behind the further monetary policy tightening was the results of the latest inflation projection prepared by the NBP (see below). Additional arguments in favour of another rate hike were the continued and substantial rise in inflation recorded in June, which, according to preliminary estimates, climbed to 15.6% YoY from 13.9% in May (with a simultaneous estimated growth of core inflation from 8.5% to 9.2%), as well as the significant depreciation of the PLN observed in the recent days, which was an inflationary factor.
NBP’s inflation projection points to strong slowdown in economic growth in 2023
In line with NBP’s July projection, based on data available up until 22 June 2022 and assuming stable NBP interest rates, there is a 50% probability that in 2022 inflation will be in the 13.2-15.4% range (compared with 9.3-12.2% in the projection from March 2022), 9.8-15.1% in 2023 (7.0-11.0%) and 2.2-6.0% in 2024 (2.8–5.7%). Thus, the short-term inflation path expected in the projection was, in line with our expectations, significantly revised upwards compared with the forecast presented in March. Such a profile of expected inflation suggests that the average annual inflation in 2022-2023 will reach double digits and in 2024 will stand well above the MPC’s inflation target (2.5%). It is worth noting that the projection does not consider the extension of the Anti-Inflation Shield until the end of 2023 forecasted by us. This extension will support lowering the inflation path forecasted in the projection in 2022-2023 and its increase in 2024. On the other hand, the GDP growth rate expected in the projection will, with a 50% probability, be in the 3.9-5.5% range in 2022 (vs. 3.4-5.3% in the March projection), 0.2-2.3% in 2023 (1.9-4.1%) and 1.0-3.5% in 2024 (1.4-4,0%). The NBP’s decision to raise the GDP growth path in 2022 comes as a great surprise in the context of strong signals prevailing in Q2 pointing to a deterioration of economic growth outlook among Poland’s main trading partners, as well as a decline in consumer confidence indices and in domestic assessments of enterprises concerning industrial production and the investment climate. The GDP growth in 2022 expected in the projection is markedly higher, and in 2023 markedly lower than our forecast (see MACROmap of 04/07/2022).
Change of tone in press release
The tone of the press release following today’s MPC meeting is less optimistic than the one published last month. The Council noted that “recently, signs of a marked decline in the global economic outlook have also become more pronounced” and removed from the press release the statement that in the coming quarters “a relatively favourable economic situation will continue” in Poland. At the same time, the Council maintained its assessment that “in the coming quarters, a continued economic growth slowdown is forecasted, and the economic outlook, both in Poland and globally, is marked by considerable uncertainty”. The MPC reiterated that “further decisions of the Council will depend on incoming information regarding perspectives for inflation and economic activity, including the impact of Russia’s military aggression against Ukraine on the Polish economy”.
Council focuses on economic growth in 2023
Today’s surprising decision of the MPC, coupled with the results of the July inflation projection, signals that the Council prioritises limiting the scale of the economic slowdown in 2023. In our opinion, such an interpretation is justified in light of the heightened and persistent inflation anticipated in the NBP projection in 2022-2024 and the small expected scale of economic slowdown in 2022. In other words, for a central bank pursuing a direct inflation targeting strategy, such a profile of GDP growth and inflation usually constitutes an argument for a further substantial monetary tightening. Our interpretation of today’s unexpected decision of the Council is supported by the small, in the context of research on the transmission mechanism in monetary policy, expected impact of a 50bp rate hike on economic growth and inflation in the medium term.
Today’s decision may be due to the fact that the NBP’s July projection, in all likelihood, does not consider the impact of disruptions in gas supplies to Germany on economic activity in Germany and, indirectly, in Poland. In other words, these disruptions represent a major downward risk factor for the expected GDP growth projection in Poland in H2 2022 and in 2023 (the potential impact of these disruptions on economic activity in Poland will be discussed in detail in the upcoming MACROmap).
End of interest rate hike cycle inching closer
Today’s decision signals a significant downward risk to our interest rate forecast (a gradual increase in the NBP reference rate to 7.75% in October 2022) and an upward risk for the EURPLN path we expect (a gradual decline to 4.62 at the end of this year). Considering our short-term inflation forecast, according to which the annual rate of price growth will remain in the 15-16% range until next October, we believe that the interest rate hike cycle in Poland has not yet been completed.Though its total scale may be lower than our forecast. We expect the macroeconomic data released over the coming months will point to a progressive slowdown in economic growth. We believe the slowdown will have a broad scope and will be reflected in a significant decline in the growth of exports, consumption and investments (see MACROmap of 04/07/2022). If this scenario materialises, it will be a primary argument for MPC members in favour of a small scale of potential interest rate hikes. The NBP President’s conference scheduled for tomorrow will shed more light on short-term interest rate prospects.
In our opinion, the press release following today’s Council meeting will be slightly negative for the PLN and yields on bonds.