The Monetary Policy Council (RPP), the Polish central bank’s rate-setting body, increased the reference interest rate by 100 basis points, to 4.50% on April 6, surprising economists who expected half the increase.
The National Bank of Poland’s lombard rate was raised from 4.00% to 5.00%, the rediscount rate from 3.55% to 4.55% and the discount rate from 3.60% to 4.60%.
The reference rate increase exceeded market expectations of a 50-basis point hike.
At the same time, the RPP also increased the deposit rate from 3.00% to 4.00%.
This is the seventh interest rate hike in a row and is seen by economists as a reaction to rising inflation and the weakening national currency.
One of the reasons of the RPP’s decision is the weakening Polish zloty against the euro, despite FX interventions taken by Poland’s central bank and the Finance Ministry, due to market uncertainty caused by the war in Ukraine.
Before the latest increases, Poland’s RPP cut rates by 140 basis points in three moves back in H1 2020, as the coronavirus pandemic struck the economy, leaving the reference rate close to zero, at 0.10%. The rate had previously been frozen at the 1.5% mark since March 2015.
In a statement published after the rates decision on April 6, the RPP said the central bank would continue to take the measures necessary to ensure macro stability, especially ones aimed at mitigating the risk of prolonged high inflation.
The Council also said the central bank might continue to intervene on the FX market to limit the Polish currency fluctuations against its main global peers.
At the same time, the Council recognized the risk of high inflation setting in for a longer period of time, but said the rate hikes should mitigate that risk as well as curbing inflation expectations.
“The Council’s future decisions will depend on the incoming data concerning the prospects of inflation and economic activity, including the impact of Russia’s armed aggression against Ukraine on the Polish economy,” the RPP wrote.
The April rate hike follows a higher-than-expected CPI flash estimate of 10.9% YoY, for the prior month, which some commentators cited as the likely reason for an above-consensus upward move. Conversely, the recent recuperation of the zloty from the initial war-related losses was believed to have reduced the chances for a bolder decision by the MPC.
Before those developments, central bank governor Adam Glapinski declared his support for strong and fast monetary policy tightening in order to curb inflation and normalize the PLN exchange rate amid elevated risk aversion, pointing at a likely interest rate ceiling of 4.0-4.5% or slightly higher. He also estimated the war’s impact on CPI at 2%.
And newly minted rate-setter Ludwik Kotecki stated that Poland should keep hiking rates “as long as it takes and by as much as it takes,” arguing that the economy could stomach at least another 300 basis points in rate hikes from the 3.50% level before facing risk of recession.
In turn, fellow RPP member Rafal Sura warned against cooling the economy too much, at the same time stressing that monetary policy should remain focused on bringing inflation back to the target range. (The First News/Business World Magazine)