Today, the Monetary Policy Council has taken a decision to increase the interest rates once again. The NBP reference rate rose from 2.75% to 3.50%. The 75-basis-point rate hike was stronger than both us and the market had expected (50bps). In its press release after the meeting, the Council noted that Russian military aggression against Ukraine has contributed to a subsequent increase in the prices of natural gas, oil, coal and some agricultural commodities, leading to a further increase in inflation pressure. In our opinion, it partly explains why the Council has decided to increase the rates more strongly than it did in the previous three months.

We also believe that a significant PLN depreciation following the Russian invasion of Ukraine was another reason behind the relatively strong increase of the NBP reference rate. The depreciation was getting stronger over the last couple of days despite the NBP’s interventions in the foreign exchange market. In our opinion, stronger interest rate increase in Poland and the subsequent increase in the difference between the rates in Poland and abroad will curb the pressure on the PLN depreciation. However, amid the growing military activity in Ukraine, the effectiveness of measures taken to counteract any further depreciation of the PLN will depend primarily on the ultimate interest rates level after the monetary policy tightening cycle is completed. The NBP governor’s press conference, which is planned for tomorrow, will probably shed more light on this issue.

It is also worth noting that the Council believes that the depreciation of the PLN is transitional. In the Council’s opinion, “the recently observed market pressure on zloty depreciation is not in line with the fundamentals of the Polish economy.” The Council believes that a modest share of exports to Russia and Ukraine in Polish foreign sales shows that the favourable business conditions in Poland will continue in the quarters to come. The Council has also declared that the NBP will take all necessary actions to ensure macroeconomic and financial stability, including by intervening in the foreign exchange market. To sum up, the text of the message suggests that we are highly likely to see more interventions in the foreign exchange market amid the PLN depreciation pressure growth that can be seen again, but their aim will still be to prevent excessive fluctuations rather than defend a specific rate.

Optimistic NBP inflation projection

In accordance with the NBP’s March projection prepared under the assumption of unchanged NBP interest rates and based on available data covering the period up to 7 March 2022, there is a 50-percent probability that the annual price growth will be in the range of 9.3–12.2% in 2022 (against 5.1–6.5% in the November 2021 projection), 7.0-11.0% in 2023 (compared to 2.7-4.6%) and 2.8-5.7% in 2024. This means that, in accordance with the projection, in 2022-2024 the average annual inflation will run markedly above the upper limit for admissible deviations from the MPC’s inflation target (3.5%). In accordance with the projection, there is a 50-percent probability that GDP growth will stand at 3.4-5.3% in 2022 (against 3.8–5.9% in the November 2021 projection), 1.9–4.1% in 2023 (compared to 3.8–6.1%) and 1.4-4.0% in 2024. The projection suggests that a short-term impact of the war in Ukraine on the economic activity in Poland will not be significant. However, a strong slowdown versus the expected GDP growth in 2023 comes as a surprise. In our opinion, it is connected with a strong inflation rise expected by the NBP in 2023, which will have a curbing impact on consumption. It is also worth emphasising that the projected inflation of over 10% in 2022 and its slight decrease in 2023 do not take into account that the Anti-inflationary Shield may remain in force until the end of 2023, which we believe will happen. The Shield staying in force will drive the inflation down in that period, but inflation will rise again in 2024. Consequently, inflation will meet the inflation target only in 2025.

Interest rates will be raised again

The Council has 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.” The press release following the MPC meeting and the results of the NBP’s March inflation projection support our scenario in which the Council will continue to tighten the monetary policy in the months to come. However, in our opinion, it is becoming increasingly probable that the Council will decide to stop the reference rate hikes above the level set in our current forecast (4.25%), motivated by a further growth in the prices of food and energy resulting from the US embargo on Russian oil that was introduced today.

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

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