The MPC will either raise interest rates or plunge the zloty

Record-high inflation, the deepening weakness of the zloty against the main currencies of the world and the actions of other central banks lead to the conclusion that on Wednesday, November 3, the Monetary Policy Council will announce a decision on another rate hike interest rates. If this does not happen, the zloty will run into serious trouble.

The Monetary Policy Council in October this year. surprised the market by unexpectedly raising the most important interest rate from 0,1 to 0,5 percent. The Polish monetary authorities, however, avoided declaring that this was the beginning of the cycle of increases. After Wednesday's decision, the cards will be revealed.

The biggest leap of the 20th anniversary

Signals from the Polish economy seem to call for another, even more daring increase in interest rates. What signals are we talking about? Of course, about inflation, which was once again very loud. In October, consumer prices were down 6,8 percent. higher than the year before. Such strong inflation has not been recorded in Poland since 2001.

The main culprits of the nearly 7% inflation are rising energy prices, but the truth is that more than three-quarters of the categories are going up at the rate exceeding the 2,5% MPC inflation target. Let the picture of price trends in the Polish economy be completed by the fact that prices made another very strong jump, this time by as much as 1%, compared to the previous month. It is becoming almost the norm that readings take values ​​above forecasts. This is a global trend. Data on prices in virtually every corner of the world show that the price pressure is not only rising, but is building up more than you might expect.

What inflation, such a reaction?

Unfortunately, there is no indication that the peak of inflation is behind us. Its annual dynamics is growing even faster than it could be assumed, because in November it may exceed 7%. Every year.

- At the beginning of 2022, prices will grow at over 7% pace, and the average annual inflation may exceed 5,5%. Prices in the base categories will also remain very high, excluding the most volatile ones, ie fuel and food prices - forecasts Bartosz Sawicki, Cinkciarz.pl analyst.

The previous spike in prices played an important role in convincing most of the world's central bankers that a delayed increase in the cost of money was needed to prevent the build-up of strong price pressures and the explosion in inflation expectations.

- Another jump in prices may lead to the conclusion that, for example, in Poland 0,5% interest rates with almost 7% inflation will turn out to be too weak a weapon - evaluates the analyst Cinkciarz.pl.

When deciding on a possible change in interest rates on Wednesday, the Council will have the content of the new inflation projection NBP. It will inevitably indicate that the return of inflation to the target (2,5%) is too distant a prospect to have the comfort of passive and patient observation of developments.

The zloty needs help

Monetary authorities have repeatedly expressed the opinion that the COVID-19 pandemic continues to be a threat that should keep people from raising the cost of money. This factor, however, has probably been pushed to the background today, the more so as the increase in the number of cases in Poland does not result in restrictions disrupting economic processes.

The argument related to the strength of the currency seems to emerge from the closer view today. An interest rate hike could improve the zloty, and the MPC's help now seems advisable, as the euro costs over PLN 4,60 at the beginning of November, the franc more than PLN 4,37, and the dollar almost PLN 4.

- Markets have already prepared for a series of interest rate increases in Poland, although no such declarations have been made. Lack of traffic this week would be a blow to the zloty in this light. It is true that the MPC has in the past expressed preferences for the currency to be weaker and thus additionally support the recovery of the economy from the coronavirus collapse. However, in the face of soaring energy resources, more and more central banks will avoid currency depreciation as much as possible, because such trends exacerbate the problems with inflation. - Cinkciarz.pl analyst observes.

Still valid forecast: euro cheaper than PLN 4,5

- Higher interest rates in Poland should have a stabilizing effect and favor a decline in the exchange rates of the main currencies. We assume that at the end of the year we will pay about PLN 4,50 for the euro, which is over 10 groszy less than at present. Such a scenario would be brought closer to the zloty by another strong move of interest rates, ie by 50 basis points this time. In view of the acceleration in inflationary pressure, we consider such a step to be the most likely. However, taking into account the MPC's bias, the market is very divided in the assessment of moves that will be taken - analyzes the Cinkciarz.pl expert.

The zloty was not able to translate into a lasting strengthening of the surprising interest rate hike at the October meeting.

- The Polish currency has certainly not helped by the specter of the energy crisis in recent weeks. It plunged most of the currencies from our basket into trouble, of course excluding those that are raw material exporters - especially the ruble. The conflict of the Polish government with the European Union also had a negative impact on the zloty. In maintaining the troubles of the Polish currency, the uncertainty about the intentions of the monetary authorities was also very important - calculates the Cinkciarz.pl analyst.