The National Bank of Poland’s decision to hike interest rates by another 50bps today came as no surprise to markets as the central bank had been very clear in its messaging that inflation will be at the top of the agenda in the near-term. With some policy makers explicitly stating a 50bps hike was needed at a bare minimum, the risks to the interest rate were always tilted to the upside for today, which meant the Polish zloty softened to reach fresh lows following the announcement.
EURPLN rises to 3-day highs after NBP follows consensus call
The decision came despite rising uncertainties around the Omicron variant which are weighing on growth expectations, as inflation fears remain plentiful. November’s inflation printed to the upside at 7.7% YoY, pushing real rates further down in negative territory and causing the NBP to prioritise keeping a lid on inflation over any Omicron-related near-term growth shocks.
The worsening near-term growth outlook has likely resulted in a less aggressive rate hike in today’s meeting. However, today’s market reaction was arguably more muted not just because of the high bar set by markets, but also due to the strong levels the zloty was already trading at after comments by Governor Glapinski sent the currency to a three-week high against the euro last week when he stated inflation is the main concern of the NBP. In the press statement, the NBP stated the scope of tightening depends on incoming economic data, suggesting that elevated inflationary pressures will likely continue to drive policy despite worsening sentiment. Looking ahead, the NBP’s dilemma between fighting inflation and preventing a large shock to growth could keep selling pressure on PLN elevated in the near-term, especially as Covid conditions worsen.
Author: Ima Sammani, FX Market Analyst