Highlights:
- NBP increases its reference rate by 25 bps to 4.50%
- The main reason is fear of persistent above target inflation
- NBP is taking summer break ahead of final autumn rate move
The National Bank of Poland raised official rates by another 25 bps on Wednesday. It was fourth monetary tightening this year that brought the base interest rate to 4.50%. However, we don’t consider it as the end of the cycle. Indeed, the NBP may now take a summer break in the cycle, but we believe one additional rate hike in Autumm is likely.
The current decision was made against the backdrop of surprisingly strong rising inflation, touching 4.5% Y/Y in April and nearing the 10-year peak inflation of 4.8% Y/Y, reached in August 2008. Also inflation expectations, to which Polish central bankers are fairly sensitive is very high (above 4%).
At the moment, the NBP must also be satisfied with the growth structure, with accelerating investment evident for another consecutive quarter. Central bankers are according to the official statement also sensitive to the risk of spillovers from inflation expectations to wage negotiations. The board believes that the recent fast tightening has somewhat diminished these risks.
The central bank governor Mr. Belka said at the conference that the board is planning to wait right now with further monetary tightening. Nevertheless he immediately added that he does not rule out further adjustments if prospects of a return of inflation towards the inflation target deteriorate. NBP was surprised by the high inflation in recent months, that amounted to 4.5% y/y in April (2% above the target). In the second quarter of this year, it may be approximately 4.4%, according to our forecasts. Such a scenario is at the very threshold of the 90% reliability range of the March NBP inflation report. Obviously, the next inflation report will revise inflation significantly higher for the remainder of the year. On the other hand, economic growth consistent with the forecast and real wages only rising slowly may signal the NBP, at Poland’s that inflation is driven by high commodity prices rather than by surprisingly high demand.
Therefore, the NBP most likely will now take a summer pause in its until now aggressive tightening cycle.. Nevertheless we continue to believe in a final move during autumn (probably September) bringing the base rate to 4.75%. Polish economy should confirm strong growth in core investments in the year ahead of European football championship, which should be reflected in improving employment as well. Beside that, inflation expectations of Polish households may remain at elevated levels above 4% for a while and putting it together with better employment picture it should convince the Polish central bankers to act once more, even in the case of a weakening of foreign demand.