The National Bank of Poland (NBP) increased its reference rate by only 25bp to 6.75% on September 7, as fears of recession begin to trump those of inflation.
The small scale of the hike, which was in line with market expectations, marks a possible end to the NBP’s year-long tightening campaign, aiming at bringing unbridled inflation under control via putting brakes on economic activity.
The real risk of recession seems to have been occupying the minds of policymakers more than inflation recently after growth halved in y/y terms in Q2, with the outlook now tilted increasingly towards at least a technical recession, analysts say.
“There was no new guidance in the communications in terms of the central bank’s next move, but with policymakers seemingly more concerned about the deteriorating economic outlook than sky-high inflation, we think this marks the end of the tightening cycle,” Capital Economics said in a comment.
For its part, the NBP said that further decisions would “depend on incoming information regarding perspectives for inflation and economic activity, including the impact of the Russian military aggression against Ukraine on the Polish economy.”
The ongoing economic slowdown could eventually bring inflation down, albeit incrementally, over the next several months. There already are signs of core inflationary pressures easing, even as food and energy prices still pushed headline inflation up to 16.1% y/y in August.
That said, some analysts point to a rare set of circumstances – Russia’s war in Ukraine being a fundamental one – that could upend any projections as to inflation trajectory.
The NBP might be expressing hope that the economic slowdown will trounce inflation eventually – via weakening credit demand and Poles’ propensity to shop – but that alone may not be enough, ING writes.
“The energy shock is so powerful that companies will continue to pass costs onto product prices, even in times of economic downturn,” ING Bank Slaski’s chief economist Rafal Benecki wrote.
The analyst adds that the Polish government is also poised for a large budgetary expansion in 2023 in line with an EU-wide trend of the authorities striving to defy the effects of Putin’s gas war on Europe.
“This is a reasonable approach, but in Poland we already have a very expansive policy mix and the side costs in the form of persistently high inflation may be higher than in other countries,” Benecki said.
Such a scenario – which boils down to stagflation – is a solid premise to expect no more hikes, even if the NBP appears in no position to declare so verbatim, according to PKO BP.
“The MPC will maintain the data-driven mode,” PKO BP said in a comment, adding that further rate hikes could come if there is “a strong and permanent weakening of the zloty or a further heating of the labour market, symptoms of which we do not see so far.”
Oxford Economics said this week that nominal wage growth in Poland might stay strong, which could keep inflation higher for longer. This would keep assets under pressure and force the central bank to maintain a tight stance, or risk a weakening of the zloty or damage to economic competitiveness, hurting medium-term growth prospects. It says the central bank is currently "struggling to re-anchor inflationary expectations”.
If it halts further rate rises, the NBP would join Czechia’s central bank CNB in its dovish stance. The CNB kept its key interest rate unchanged at 7% in early August, making it the first bank in Emerging Europe to halt the tightening cycle.
In contrast to Poland and the Czech Republic, neighbouring Hungary’s central bank NMB delivered another solid hike – this time of 100bp - to bring its base rate to 11.75% in late August, continuing the bid to fight surging inflation, which could hit 20% at the end of the year.