Out of the 29 estimates submitted to Bloomberg, none expected today’s National Bank of Poland meeting to include any changes in policy. The same goes for markets, with implied interest rates envisaging no change in today’s interest rate. However, in reality, the NBP hiked its policy rate by 40bps to 0.50%, marking the start of an aggressive tightening cycle to bring inflation back to the central bank’s target of 2.5% +/- 1pp.
The pressure was rising for the NBP to at least start preparing for a tightening cycle after inflation hit a two-decade high of 5.8% YoY in September. The morning of the rate hike, Prime Minister Mateusz Morawiecki said he expected an “appropriate” response from the central bank to the fastest price growth in two decades. However, given that August’s reading also printed at a 20-year high of 5.5% at the time, and the NBP also neglected this in the September meeting, market expectations for today were at a minimum. Instead, economists were looking for hints of a rate hike at the November meeting.
For the National Bank of Poland, a surprise rate hike is a big deal. Over the course of the last year, the NBP signalled multiple times its preference of a weaker zloty during the pandemic to support the economic recovery and strengthen the impact of any monetary stimulus. Beyond this, the central bank likely intervened in currency markets a year ago to avoid the zloty from strengthening too excessively.
Today’s move pushed EURPLN down to the 4.55 levels again – a level not seen in the last three weeks – and the fact the NBP chose this route over waiting another month to match market expectations and avoid any large market impact indicates that policymakers have now become more concerned about a prolonged period of above-target inflation, and that this weighs more to the committee than any currency strength limiting economic growth. With inflation having been surging recently and EURPLN having reached 6-month highs as a result, such a decision by the National Bank of Poland can be easily justified.
For this reason, we expect today’s move by the NBP to be the start of a more aggressive hiking cycle.
Supply-side disruptions are likely to continue pressing on prices while European gas prices feed its way through to consumers as well. At the same time, rising wages are driving up costs, while consumers have just started to reap the benefits of economic reopening. Looking ahead, the November MPC meeting will be crucial to gauge the central bank’s reaction function as the meeting includes a fresh inflation report.
EURPLN reaches fresh lows after surprise rate hike
Author: Ima Sammani, FX Market Analyst