The Monetary Policy Council has probably ended the cycle of interest rate increases, but it cannot be ruled out that the macroeconomic situation will force further monetary policy tightening next year, economists comment on Wednesday’s MPC meeting. However, some experts believe that the next step of the MPC in the second half of 2023 will be interest rate cuts.
The Monetary Policy Council decided to keep it NBP interest rates at an unchanged level – announced in Wednesday’s announcement. This decision was expected by most economists. The main reference interest rate is 6.75 percent.
On Thursday, December 8 at At 15.00 there will be a press conference of the President of the National Bank of Poland, Adam Glapiński.
Shotgun attached to the wall
“First of all, the MPC emphasizes the economic slowdown more strongly, interjects information on the decrease in the number of employees in the Polish economy (LFS data), notes – probably – a clear decrease in the prices of food and production components, because they disappeared from the communiqué as factors whose prices increased (next to raw materials)” – we read in the analysis of mBank.
Economists stressed that the MPC expects inflation to fall towards the target. “This process will be protracted and uncertain. Decisions will continue to be driven by data, although changes to the release indicate that a shotgun that could fire with higher feet appears to be more firmly attached to the wall and will become increasingly difficult to remove. Our Scenario The base rate is unchanged in 2023.
What would have to happen for the MPC to change its mind? “We believe that the next ‘live’ meeting (one where a more interesting discussion on the optimal level of interest rates may take place) is March. Then we will know how the data from the beginning of the year (wages, inflation) will develop. The MPC will also have a new projection (Let us first of all remember that the wages loaded into the model are underestimated due to the surprise regarding the starting point and high wage increases in the national economy in Q3).
“If in the same period we do not see factors that will allow us to believe in a solid inhibition of growth GDP (below zero), the situation will become tense. Additionally, if the opening of the Chinese economy causes an increase in commodity prices, it will paradoxically be a factor favoring interest rate hikes among many MPC members (this body always says that these prices are exogenous, but it always reacts to them). In our opinion, in such a situation, the MPC will first try to lower expectations for interest rate cuts in 2023 and 2024 (these are booming). However, the risk of price increases remains non-zero, and the market has completely downplayed it, the analysts concluded.
Goldman Sachs economists estimate that after inflation drops to 17.4 percent. in November, core inflation increased by 0.4 pp. to 11.4 percent “Therefore, we remain with our concerns about core inflation dynamics, which in our view at this stage reflects the progressive de-anchoring of inflation expectations, justifying further monetary policy tightening,” they added.
According to them, the pressure for a more restrictive policy of the NBP may be exerted by a large current account deficit and the expected significant fiscal easing next year. “The question of whether the combination of the above factors will translate into actions in the area of monetary policy depends to a large extent on the exchange rate. With the strengthening and stabilization of the EUR/PLN in recent months, the need for an immediate response of the central bank has recently decreased” – they emphasized.
For ING analysts, the decision of the MPC is not a surprise. “It is in line with the de facto target, which the Council itself defined as a slow disinflation and a mild deceleration of GDP. The de jure target, i.e. inflation at the level of 2.5% +/-1 pp. is currently less important. Hence (.. .) decision to leave interest rates unchanged, despite many risks of long-term high inflation,” we read in the commentary.
“Today, the world sees the first signs of weakening price pressure, i.e. a significant improvement in global supply chains, a drop in energy raw material prices, inflation has passed its peak in countries not affected by the gas shock, e.g. USAbut not Europe. As 2021-22 saw the biggest price shocks since the 1970s, and bonds of many countries were losing value, short positions in government securities are currently being reversed, which also resulted in the strengthening of Polish debt.
They explained that the experience of other countries, where inflation expectations were “unanchored” and the price spiral started, showed that in order to combat stubbornly high inflation, it was necessary to significantly tighten the policy mix, i.e. monetary and budgetary policies.
“Therefore, in 2024, we will face either further interest rate increases or a strong tightening of fiscal policy. The final costs of fighting long-term high inflation will be higher than if the tightening of the policy mix was greater at present,” the analysts noted.
Pekao bank analysts agree with market expectations that the next move in Polish monetary policy will be a rate cut. “In the past, the end of the cycle of hikes and the beginning of the cycle of cuts was on average half a year apart and in our opinion this is the minimum that will separate the last hike (in September this year) from the first cut. This implies that only in March the MPC will have enough data to even think about turning in this direction. For this reason, today’s conference of the NBP president is unlikely to bring any changes in the Bank’s rhetoric” – they commented.
“In our opinion, the room for interest rate cuts will appear at the earliest in the second half of next year. The MPC will be guided by the willingness to maintain non-negative real (ex ante) interest rates,” they forecast.
Bank Millennium analysts assessed that in the light of the available information, data and forecasts, it is most likely that the Council has already finished tightening the monetary policy in this monetary policy cycle. “We do not believe that today’s conference of the NBP president will influence the modification of this (baseline) scenario. Taking into account the economic uncertainty, however, in our opinion, a return to interest rate hikes cannot be completely ruled out, especially in the conditions of rising inflation, failure to implement government fiscal consolidation plans or significant depreciation of the exchange rate.
They added that the downward inflation surprise in November and signals of economic slowdown in Q4 2022 fueled discussions about the possibility of starting monetary policy easing already in 2023. this scenario, although the election year raises a certain risk of premature interest rate cuts, which would mean allowing for an even longer period of inflation convergence towards the target.
Main photo source: PAP/Pawel Supernak