Poland: the central bank slows down the tightening cycle | Article


The MPC raised interest rates by 25bps (the benchmark to 6.75%), in line with our view and consensus expectations. The shift to smaller 25 basis point increments in the tightening cycle (the previous hike was 50 basis points in July) reflects policymakers’ growing concern about the outlook for economic growth. At the same time, however, inflationary pressures persist. In August, inflation hit its highest level in decades, at 16.1% year-on-year. Moreover, the outlook for inflation remains very uncertain, as the economy has not yet fully absorbed the new energy shock. This process has already started and is one of the reasons why core inflation resumed its strong sequential rise in August, to around 10% year-on-year. Businesses continue to pass on rising costs to the prices of their goods and services. In our view, the peak of inflation is still ahead and we expect CPI around 20% YoY in February 2023.

Key changes to the statement suggest the Council is relying heavily on the economic slowdown to reduce inflation. However, we are concerned that the slowdown in GDP alone will materially achieve this objective. The latest energy shock is so powerful that companies will continue to pass on costs to product prices, even in a weaker economy. We also expect strong fiscal expansion in 2023. European governments want to show that the gas war will not derail their economies. It’s a reasonable approach, but Poland already has a very expansionary policy mix. The side effect of these energy programs could therefore be permanently high inflation, and this risk is quite high in the Polish economy.

In this environment, the MPC is likely to avoid explicit statements about the imminent end of the bull cycle, leaving itself room for further monetary tightening. In our view, interest rates could eventually climb to 7.5% in the current cycle, and there will be no room for monetary easing in 2023, especially if there is further fiscal expansion, as households and sensitive industries are protected from the consequences of rising energy prices in the coming election year.

The tone of today’s press conference by NBP Chairman Adam Glapinski will be key in shaping market expectations of the monetary policy outlook. We are concerned that the President will once again adopt a dovish tone, although in light of the uncertainty over the continuation of inflation’s path, he is unlikely to explicitly state that he is prepared to put end to the cycle of rate hikes. In addition, he can again announce that the conditions for an interest rate cut could emerge at the end of 2023. The Prime Minister spoke on Tuesday of the imminent end to interest rate hikes.

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