News & Analysis

The Polish zloty found support in today’s decision by the National Bank of Poland to increase its policy rate by 75bps to reach a level of 1.25%, slightly below its pre-covid rate of 1.50%, as this caught markets off guard again after October’s unexpected 40bp hike.

A November hike was unanimously expected by economists surveyed by Bloomberg, but the majority expected a more moderate move of 50bps. Along with the rate hike, the Council scrapped its plans to continue QE purchases and reiterated that they may intervene in FX markets. The hawkish surprise comes after preliminary price growth data showed October’s inflation advanced further to 6.8% YoY, its highest level since December 2000, while upside inflation risks were in focus in the NBP’s press statement too. The Bank expects 2021 CPI to increase to 4.8-4.9% vs 3.8-4.4% previously, while growth in 2021 is set to rise to 4.9-5.8% compared to 4.1.5.8% previously.

 

Chart: Zloty on the rise as EURPLN reaches 10-day low

It will be difficult for the Governing Council to regain confidence from investors after their one-and-a-half year long period of flat rates suddenly ended with no warning at the October meeting and is now followed by another significant surprise rate hike.

While the decision was reportedly unanimous, external pressure from former policy makers and government officials have likely made it more difficult for the NBP to maintain a low policy rate while inflation continues to overshoot: just a day before the policy meeting, Deputy Finance Minister Piotr Patkowski let markets know in a radio interview that domestic inflation is very likely to reach 8% this year. If one thing is clear, it is that the NBP doves have less of a say in determining what policy looks like, whether it is due to external pressures or inflation forcing their hand, as the central bank’s patient stance has been thrown out the window since the beginning of this quarter.

Looking ahead, markets may be up for more hawkish surprises by the NBP should their median 2022 inflation forecasts of 5.1-6.5% be believed.

While on the surface they indicate sustained policy tightening, whether the NBP opts to slow the normalisation process from hereon in or continue to front-load its hiking cycle is yet to be signalled to markets. With price pressures unlikely to abate before year-end as the factors driving inflation, such as high energy demand and supply chain disruptions, remain persistent, the NBP is likely to close out the year with rates at pre-pandemic levels at a minimum. The NBP’s path ahead will be made clearer when the inflation report is released on Monday, however.

 

Chart: Polish 10Y yield rises to 2019 levels after surprise rate hike

 

Author: Ima Sammani, FX Market Analyst

 

 

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