Interest rates rose for the tenth time in a row in July. The reference rate is at its highest level since August 2004. In addition, according to economists, this is not the end of rate hikes. However, their forecasts do not agree at what level the current cycle will end.
The Monetary Policy Council raised interest rates by 50 basis points during the meeting in July. Principal, benchmark interest rate rose to 6.50 percent. This is the highest level since August 2004. The president of the National Bank of Poland and the chairman of the MPC, Adam Glapiński, during the Friday press conference, announced that if inflation will persistently continue to grow, the Council will continue to raise interest rates. “If it stabilizes during the summer and goes down, we won’t do it,” he added.
As Glapiński said, “those feet that are now are approaching their upper level – maybe they have reached, maybe they are close”. – We do not know what the situation will be in September and October. We will see what is happening with inflation, what is happening abroad, what is happening in the markets, but maybe, and maybe not, we will continue to raise rates, if inflation rises, we will raise rates, the head of the central bank announced.
The next decision-making meeting of the MPC will be held on September 7. According to the current schedule, the meeting scheduled for August 23 will be non-decision.
What will be the peak of interest rate hikes?
Economists of ING Bank Śląski, on the basis of Friday statements of the NBP governor, estimate that “the end of the rate hikes cycle is still distant”. In their opinion, the reference rate will increase to the level about 8.5 percent.
“The president (Adam Glapiński – ed.) Spoke more cautiously about the near peak of the CPI (in our opinion it will be later than in the summer), and additionally the weak zloty caused a tightening again. In our opinion, there will be more hikes, but on a smaller scale (around 50bp rather than 75bp). -100bp) We still believe that inflation increases in 4Q22 and 1Q23 as well as long-term inflation risks will require rates to be raised to around 8.5 percent, “the ING Journal reads on Monday.”
BNP Paribas economists maintained their expectations for the reference rate to rise to 8.0 percent in the fourth quarter of 2022. “The arguments for the above scenario are, among others, the situation on the European energy market, the maintenance of expansionary fiscal policy by the government, the presence of a wage-price spiral and the still weak zloty,” they wrote on Twitter.
“However, while earlier we saw the risk of an upward revision, we now attribute a downward revision to the reference rate level more likely,” added economists from BNP Paribas. In their opinion, “this is supported by dovish rhetoric of the MPC and the growing risk of a deeper economic slowdown, which in the scenario of limiting the supply of energy resources could translate into a recession”.
Credit Agricole economists wrote that “the content of the communiqué after the MPC meeting and the comments of the NBP president indicate a significant downward risk to our forecast of interest rates (a gradual increase in the NBP reference rate to 7.75 percent in October this year) and upward risk for the EURPLN path we are expecting (a gradual decline to 4.62 at the end of this year) “.
Bank Pekao analysts assume an additional 100 points in the base scenario interest rate increases in the third quarter of this year. This would mean that the reference rate would rise to a level 7.50 percent. Bank Millennium economists present similar forecasts. “At the moment, we are not changing our forecast of the target rate target (7.50 percent), although the balance of risks is shifting towards a slightly smaller scale of monetary tightening “- they wrote in Monday’s commentary.
According to mBank, the MPC may continue to tighten monetary policy after the summer holidays. At the same time, the bank’s economists indicated that they did not feel any pressure to move the target rate up. “Around 7 percent seem to us still adequate to the situation “- they wrote.
PKO BP economists pointed out that the NBP president Adam Glapiński reiterated at the press conference that the MPC was approaching the end of the monetary policy tightening cycle, although it had not necessarily been achieved. In the “Economic Quarterly”, published at the end of June this year, ie before the July meeting of the MPC and the conference of the head of the central bank, they indicated that interest rates would increase by 50 basis points during the September meeting. If such a scenario were realized, the reference rate would go up to 7.00 percent.
According to PKO BP, this may be the end of the rate hikes cycle. According to economists’ forecasts, the first reference rate cut may take place in the third quarter of 2023. The main NBP rate is then expected to be at 6.50 percent. In the fourth quarter of next year, it should be 5.75 percent.
What do futures contracts say?
Bartosz Turek, the chief analyst of HRE Investments, pointed out in the Monday analysis that the latest signals from the NBP also had a very clear impact on the interest rate futures contracts (FRA), “which are an emanation of expectations about what will happen in Poland with interest rates “.
“Even on Thursday (7 July) they suggested that the main interest rate may reach or even exceed the level of 8 percent this year. On Monday 11 July before noon these expectations fell to around 7 percent. This suggests that in September the MPC it may raise interest rates again, but already in October a similar decision is not sure at all “- explained Turek.
Daniel Kostecki, director of the Polish branch of Conotoxia Ltd., also pointed out on Twitter.
In addition – as Bartosz Turek noted – the aforementioned forward contracts for the interest rate suggest that the first interest rate cuts will take place in 2023. “At least such a scenario is suggested by the latest market quotations. However, these can be volatile. Therefore, prudently managing the home budget, it is always worth preparing for worse scenarios – especially because it is not known what path inflation will follow” – Bartosz Turek noted.
Main photo source: TVN24