The National Bank of Poland (NBP) left its reference interest rate unchanged at 6.75% on October 5, marking at least a pause to its tightening cycle.
The decision comes as a major surprise after inflation accelerated to 17.2% y/y in September, which had the market pencil in a raise of 25bp to 7% at least. But NBP’s concerns over economic growth apparently outweighed inflation risks. The central bank had slowed its hikes in interest rates to 25 basis points at its previous meeting on September 7.
“Hitherto significant monetary policy tightening by NBP and the expected economic activity growth slowdown, which in part stems from external shocks, will contribute to curbing demand growth in the Polish economy, which will support a decline in inflation in Poland towards the NBP inflation target,” the central bank said in a statement.
“At the same time, given strength and persistence of the current shocks that remain beyond the impact of domestic monetary policy, a return of inflation towards the NBP inflation target will be gradual,” the NBP also said.
The halt to the Polish rate rises means that all three of Central Europe's independent central banks have now at least paused their monetary policy tightening cycles. The Czech National Bank kept its key interest rate unchanged at 7% in early August, making it the first bank in Emerging Europe to halt the tightening cycle. The Hungarian National Bank also ended its tightening cycle on September 27, triggering a sell-off in the forint.
Analysts say that the NBP’s dropping references to inflation easing “in the coming years” while mentioning the inflation target – which is 2.5% with a deviation range of 1.5%-3.5% – are not strong enough premises to say that the Polish monetary policy tightening cycle has actually come to an end.
“The doors are still open for another interest rate hike,” Jakub Borowski, chief economist of Credit Agricole Bank Polska said in an emailed comment.
The NBP’s future monetary policy course will now depend on incoming macro data.
The economy is feeling the pinch already, PKO BP says.
“We observe … a sharp decline in household loan demand and a slowdown in consumer demand while the concerns about the price-wage spiral have not materialised,” PKO BP said in a comment.
“It is worth remembering that in the conditions of anti-crisis measures, the fiscal policy gains a greater impact on inflationary processes,” it added.
The government’s fiscal expansion in response to the energy crisis and the expenditure ahead of the elections next year could complicate the central bank’s efforts to contain inflation.
“There are justified concerns that the current level of NBP interest rates may prove insufficient to bring inflation down to the NBP's target. Especially that fiscal policy and other government measures partially neutralise anti-inflationary effects of the central bank's actions,” Bank Millennium said.
More insight into the central bank’s current standing on monetary policy and the economy in general is expected on October 6, when the NBP’s Governor Adam Glapinski will hold a press conference.