NBP strikes for the second time and increases rates to 4%

Highlights
 - NBP increases its reference rate by 25 bps to 4% 
 - The main reason - inflation expectations leapt to 4.6% in March 
 - We believe in two more 25 bps rate hikes this year

In-line with our expectations, the National Bank of Poland (NBP) decided to increase the reference rate by 25 basis points to 4% on Tuesday. It happened despite the fact that headline inflation has been driven mainly by high commodity prices. According to the NBP official press release, a significant increase in inflation expectations was the main reason for the rate hike.
Importantly, NBP Governor Belka and the key median voter in the MPC, said during his press conference that he could not say that the central bank was nearing the end of the tightening cycle. Nevertheless, he added that the majority of the Monetary Policy Council members thought that the current pace of growth was not strong enough to accelerate inflation per se. But the NBP tightening cycle is far from over.
Since we estimate that the CPI inflation grew to almost 4% on a year-on-year basis in March and might even breach this level in April, we bet on two more hikes this year. In this respect, we think that the next one might come at July’s monetary policy meeting and the second hike might take place in the last quarter of this year.
Concerning the market reaction, the zloty has posted solid gains and drifted below 4 EUR/PLN level after the NBP decision. In this regard, renewed rate hike bets might trigger some short-lived rally, but one should take into account that a lot of rate hikes have been already priced in (e.g. FRA 6x9 stand at around 5.0 %).

Petr Baca,
CSOB Prague