The Polish Central bank hiked the interest rates by 25 bps to 4.75% as we expected, while the market was caught by a surprise (only about one third of analysts according to the Bloomberg poll had forecasted the hike). The immediate reaction was dramatic especially on the money market – FRA 3X6 inched up by 25 basis points and there is one more hike currently priced in the market in one month horizon. The zloty tried to gain on the news, but failed as sentiment in the euro-zone deteriorated and weighed on all regional currencies.
Although we believed in a interest hike given the recent hawkish rhetoric of the NBP and its well known sensitivity to persisting higher inflation expectations, we still consider yesterday’s move to be a policy mistake. It is true that inflation expectations as well as inflation stayed at elevated levels for extended period, but both have already peaked. Moreover, wage pressures remained very reasonable with real wages being more or less flat now. Furthermore there are good reasons to be afraid of slower domestic demand in the second half of the year and risks for external demand are clearly skewed to the downside given the escalation of the euro-crisis. Hence, we stick to our view that the May hike was only an one-off action designed to show markets that the NBP takes inflation expectations seriously. Although governor Belka left the doors open for further tightening, he clearly said the chances of further hikes ‘are smaller’ now.