Poland Watch: Rate hike outlook delayed again?

“Tightening monetary policy would be very risky” — that was the headline of an interview with the NBP Governor released just before this week’s MPC meeting which, unsurprisingly, brought no change to interest rates or the policy stance.

This headline is a good summary of the stance shared by the Governor in the last days about the near term outlook for interest rates (increasingly likely still flat). A similar message has been revealed during the post-meeting conference which took place yesterday.

The bottom line is: inflationary pressures are driven by supply-side factors while there is still uncertainty about the economic recovery from the pandemic. Meanwhile, inflation is expected to decrease next year even if there will be factors driving it upwards. The MPC is focusing on its inflation target but currently does not see a need to react to its high levels.

Interestingly, this message comes after several rather hawkish comments from MPC members made throughout August, as CPI grew by 1pp within 2 months to 5.4% in August (vs. the target band of 1.5-3.5%). As visible in the table below, recent comments reveal at least 4 members who could have voted for a hike already or until November. Given consistent upward surprises to CPI in the last months, the new economic forecasts, which will be updated at the crucial November meeting, are set to reveal an even higher CPI path. It will be most interesting to see how much lower inflation dynamics will be expected in 2022 and 2023 (compared to 2021), although here, again, the Governor has been repeating that the Council may tolerate inflation above the target. A reaction would be triggered, according to the Governor, in case the rise above target is caused by demand-side factors while also revealing upward pressure on wages. While the MPC now seems not to assume such a scenario, it cannot be excluded that one like that will be revealed in the November forecast update. By then we will also know more about the impact of another wave of the pandemic which seems to be unfolding in Poland currently.

All the comments from the Governor presented this week again decrease the chances of a rate hike already this year. However, while we stick to our baseline forecast of a rate hike in Q1 next year, we still do not exclude such a move in November.

We also continue to expect an end to the QE programme to be announced this year. As the Governor has repeated, before rate hikes occur the program will end, while purchases have already been reduced again in the last months (as visible in the graph below).