Interest rates sharply up, EUR / PLN (temporarily) sharply down

The Monetary Policy Council raised interest rates today by 75 basis points to 1,25 percent. The zloty was gaining in the first moments after the announcement of the decision, the euro was for a moment the cheapest in two weeks and cost PLN 4,5530. However, the rate managed to return to PLN 4,5920.

This is the second consecutive MPC meeting with a change in the cost of money. In October, the Council shocked with a rate hike from 0,1 to 0,5 percent. At the same time, the monetary authorities did not want to give any hints as to whether they had started a tightening cycle.

Interest rates up, what next?

However, another jump in inflation in Poland forced an increase, and a very decisive one. Its aim is to prevent an explosion in inflation expectations which, given the strong labor market in our country, would translate into an even stronger increase in wage requirements. In this way, price increases, largely due to the sharply rising prices of energy commodities, could turn into one that results from rising wages and strong demand.

- In October, consumer prices were down 6,8 percent. higher than the year before. Inflation will not ease off in the coming months. At the beginning of 2022, prices will increase at over 7% year-on-year, and the average annual inflation is likely to exceed 5,5%. Prices in the base categories will also remain very high, i.e. excluding the most volatile fuel and food prices - comments Bartosz Sawicki, Cinkciarz.pl analyst.

Similar conclusions, ie no prospects for a quick return to the inflation target (2,5%), are included in the latest NBP projection. Its content was known to central bankers when making decisions and could play the role of the proverbial "tongue in the balance". It assumes that inflation will not return to the target by the end of 2023, and will only probably approach the upper deviation (3,5%).

- In our forecasts, we assume that at the end of the year we will pay EUR 4,50 for the euro, which is over PLN 10 less than at present. The second interest rate hike this year significantly increased the likelihood of such a scenario, pushing EUR / PLN away from 4,60. Even more important could have been the central bankers outlining a transparent strategy of action and the announcement of further increases. The latter is not included in the communiqué after the meeting. We also did not receive clear instructions during the press conference of the NBP president Adam Glapiński. Nevertheless, we expect more moves in interest rates at the upcoming meetings, which will bring the cost of money to around 2,5%. An important role may be played by personnel changes in the composition of the MPC. If President Glapiński is not appointed for a second term, only one decision-maker, Cezary Kochalski, may influence monetary policy in a few months from the current Council. As a result, the zloty will remain on the upward path, but it will have a more winding and bumpy course than if the central bank had clearly stated its intentions - concludes the Cinkciarz.pl analyst.