The National Bank of Poland (NBP) raised its reference rate by 75bp to 1.25% on November 3. 

The hike was expected but the central bank’s Monetary Policy Board (MPC) surprised markets by the scale of the tightening, as the consensus prediction pencilled in an increase of 50bp only. But the fast-rising inflation – with y/y growth in October clocking in at 6.8%, a 20-year high – was eventually bound to elicit a reaction by the monetary policymakers.

That said, the NBP noted in its communiqué after the announcement that most of the inflation’s upward drive is due to “external factors beyond the control of domestic monetary policy” .

High prices of energy and agricultural commodities, growing prices of electricity prices and of waste disposal charges, as well as disruptions in global supply chains and international transport, are key inflationary factors, the NBP said.

“The ongoing economic recovery, including demand driven by rising household income, has also added to the price growth,” the central bank added. 

During the press conference after the announcement of the decision, the central bank’s governor Adam Glapinski said that inflation would “peak in January at around 7% or slightly more and will begin dropping from then on.”

Poland has now followed more closely behind Hungary and the Czech Republic in reacting to rising inflation in Central Europe, recovering from the COVID-19-induced recession. The rates in Hungary are at 1.8% while Czechia’s are at 1.5% – with more tightening expected in both countries in the months to come.

“The NBP’s decision to raise its policy rate by a larger-than-expected 75bp to 1.25%, at today’s meeting suggests to us that it is taking the fight against inflation much more seriously than we had thought,” Capital Economics said in a comment on the central bank’s decision. 
 
Some analysts say, however, that the NBP not much short of panicked, after seeing the October inflation reading and this was very much in contrast to Glapinski’s earlier statements that raising interest rates still in 2021 would be “a schoolboy error”.

“The November decision, as well as the unexpected rate hike in October, means admitting the wrong perception and communication of risks for inflation that the MPC had been presenting,” Bank Millennium said. 

“The delayed reaction of the MPC to the mounting inflation risks means that its reaction is faster and more impetuous. This may result in a higher cost of bringing inflation down to the NBP target,” it added.

The hike brings Poland’s interest rates back to the level last seen in March 2020. Given the hectic style of the central bank’s communications, however, the pace of the tightening cycle is anybody’s guess.

“With a prolonged period of above-target inflation a serious risk, we now think rates will rise to 2.75% in this cycle,” Capital Economics said, upping its previous forecast of 1.5% for the target rates.

“We assume that the current MPC will end its term in office with the reference rate at 1.5%. However, we do not believe that this will be the end of the monetary policy normalization cycle and the MPC will continue the process of rate hikes in the new term,” Bank Millennium said.

"[Another] rate hike in December, by at least 25bp, should be the baseline scenario now," Bank Pekao said.

There also is a political context to the NBP’s decision. A number of government figures have gone on record recently with suggestions that the NBP should take a more hawkish approach, as inflation is eating into voters’ wallets less than two years before elections.

The central bank also published new inflation and GDP growth projections. 

The CPI is now expected to reach 4.8-%-4.9% in 2021 versus the previous outlook of 3.8%-4.4% that was published in July. After that, the NBP predicts inflation at 5.1%-6.5% in 2022 (2.5%-4.1% in the previous outlook) and 2.7%–4.6% in 2023 (2.4%–4.3%)

Economic growth is expected at 4.9%-5.8% this year, a slight pick-up against 4.1%-5.8% in the July outlook. Economic expansion will come in at 3.8%-5.9% in 2022 (compared to 4.2%-6.5% expected in July) and 3.8%–6.1% in 2023 (4.1%–6.5%).