Interest rates up - are we in danger of stagflation?

Interest rates rose by 75 bp., which is more than the market consensus was. This allowed to halt the weakening of the zloty. At the same time, as a result of the increase, the installment of a housing loan in the amount of PLN 300 thousand. PLN for 25 years increased by PLN 135. Concerns about stagflation are growing worldwide. This word for a combination of inflation and stagnation is now the most searched for on Google in a decade.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.

Inflation, rates, zloty ...

The MPC raised interest rates yesterday by 0,75 bp., the base rate increased to 3,5 percent. The rate hike was higher than the market consensus which predicted a 50 bp hike, but at the same time lower than the market expectations from the last hours, which were driven by the weakening zloty exchange rate. The proposed increase is therefore a compromise between these expectations. The interest rate increases increase interest rates on bank deposits, but the difference between the interest rates and the value of 9,2 percent in January. inflation remains high. Therefore, deposit holders lose about 6 percent on them all the time. annually. Rising rates are also translating into an increase in mortgage rates. Home loan installment in the amount of PLN 300 PLN for 25 years (with a margin of 2,6%) increased as a result of this increase by PLN 135, and from the beginning of the series of increases by 45%. that is 620 PLN.

The decision had an immediate impact on the currency market, the euro rate dropped during the day from almost PLN 5 to PLN 4,85. The zloty has been weakening in recent days due to an outflow of capital from more risky markets to markets considered safer. The increase in interest rates increased the return on capital held in Poland, and thus slowed down the outflow of capital to other markets. This should have a stabilizing effect on the zloty exchange rate in the near future.

At the same time, the central bank announced new inflation forecasts - at the end of 2022, inflation will fall below 50 percent. probability in the range of 9,3-12,2 percent. (the forecast from November 2021 predicted an increase of 5,1-6,5%). This is clearly the effect of a drastic increase in the prices of raw materials, especially oil and natural gas. Petrol prices at gas stations are close to PLN 7, and diesel prices have exceeded PLN 7,5. And these prices do not yet contain the latest oil price increases.

Commodity prices increase the risk of stagflation

Such high inflation and an increase in the prices of energy commodities that cause consumers have less money left in their wallets for other expenses, raise concerns about the risk of stagflation. It is a combination of high inflation and economic stagnation, i.e. a decline in GDP or a slight increase in it. Data from Google Trend show that the search term stagflation is currently the most searched for in the last decade. We already have one of the components of stagflation, i.e. high and constantly growing inflation. The second would be a significant slowdown in economic growth in the coming quarters. The slowdown in growth will be affected by the aforementioned significant increase in commodity prices, which drives the prices of gasoline, natural gas and electricity. Yesterday's decision on the embargo on Russian oil by the US and Great Britain may further increase the prices of this commodity. Even if the embargo
will not be introduced by the European Union (as a result of objections from, among others, Hungary), and in addition, oil would flow to the market from Iran or Venezuela, oil will still remain expensive, at least in the medium term.

Growth is limited by the problems in supply chains in the world that affect many entrepreneurs in Poland. We are also seeing perturbations related to the conflict in Ukraine on the labor market. Refugees are pouring in - mainly women and children. Due to the provisions of the law, refugees have the possibility to quickly start work without unnecessary and lengthy formalities. At the same time, however, many companies complain about the outflow of workers from Ukraine - men who leave to enlist in the army. This state of affairs mainly affects the industries most dependent on foreign workers, e.g. construction. So far, it is not known how such a set of conditions will ultimately affect the labor market. In the fourth quarter, GDP growth in Poland amounted to 7,3%. y / y According to the forecasts of the European Commission, GDP is expected to increase by 5,5 percent at the end of this year. YoY, however, it seems that due to the war, this forecast is no longer realistic and the growth will be lower by 1-1,5 pp. However, the economy is still growing rapidly, which is confirmed by the 2021% increase in investments recorded in the fourth quarter of 11,7. y / y This means that the risk of stagflation in Poland is small.

The problem is not only about Europe

Concerns about stagflation are also emerging in the US. The current forecast of GDP growth in the US in 2022 is 3,7%, with inflation at the end of the year at 5%. Both of these forecasts will probably worsen, but also in the US, growth seems not to be threatened. GDP in the fourth quarter of 2021 increased by 7 percent. y / y, the PMI index is at 56, pandemic restrictions are also fading away - this should support growth in the coming months. And the Fed must take into account its dual mandate in its upcoming decisions - concerning inflation and growth.

The 70s are now a guide for us on how to invest during stagflation if it did occur. The relative winners in such a period would be raw materials, real estate, as well as defensive stocks, with favorable valuations - healthcare, utilities and basic consumer products.