The NBP's MPC raised interest rates by 25 bps yesterday in what was one of the best flagged decisions ever and came out with a market-neutral moderately restrictive statement, which was also completely ignored by the market. It came as no surprise that the Council pointed out that the April inflation projection would show a more favorable CPI
than the January report. Nevertheless at the same time it did not distance itself from the projection any more (as it did in previous months). Accor
ding to these estimates inflation was still expected to inch up to the upper bound of the central bank target range (3.5% y/y) in 2009. As such the projection shows that risks to inflation remain on the upside which itself was the reasoning behind the (pre-emptive) hike. On the other hand the Council dropped the phrase that “further monetary tightening might be needed to keep inflation in check” in a clear bid to sooth expectations of further monetary tightening (we uphold our baseline scenario that rates will go up only once again in July to 4.5%). Interestingly MPC moderate Andrzej Sławiński, who surely voted in favor of the rise, indicated that there was no doubt that the economy was growing above potential while NBP president Sławomir Skrzypek played down the chances of more tightening. The Council as a whole indicated that further moves would be dependant on data, particularly on the relationship between wage growth and productivity as well as the zloty exchange rate. Rate setters also acknowledged that the CPI
would temporarily drop markedly below the target in H2 2007 (due to the base effect in food and fuel prices).
We believe that this remark not only means that it will not react to the (expected) drop but that with medium term inflation risks on the upside it may want to keep the window for more tightening open even when the CPI
heads south as supply factors kick in later this year. To sum things up the Council kept its restrictive bias in place, but seems to have put off further hikes at least until July, when the next inflation projection is released. Moreover according to our estimates July will be the last month before the high base in food and fuel prices kicks in pulling inflation down temporarily. In this case if the July projection shows an increase in CPI
to above 3% the MPC would most likely opt for yet another cosmetic hike.