Poland hikes interest rates by 100 basis points

Poland hikes interest rates by 100 basis points

The Monetary Policy Council RPP, Poland's central bank's rate-setting body, increased the reference interest rate by 100 basis points bps to 4.50 percent on Wednesday, surprising economists who thought half of the increase was due to the fact that half of the increase was expected to be made by the Monetary Policy Council.

The national bank of Poland's lombard rate was raised from 4.00 percent to 5.00 percent, the rediscount rate went from 3.55 percent to 4.55 percent and the discount rate from 3.60 percent to 4.60 percent.

The deposit rate was increased from 3.00 percent to 4.00 percent at the same time.

This is the seventh interest rate hike in a row and is seen by economists as a result of rising inflation and the weakening national currency.

The RPP's decision is due to market uncertainty caused by the war in Ukraine and the weakening of Polish zloty against the euro, despite the FX interventions taken by Poland's central bank and finance ministry.

The reference rate was close to zero before the latest increases, and Poland's RPP cut rates by 140 bps in three moves back in H1 2020, as the coronaviruses hit the economy, leaving the reference rate close to zero, at 0.10 percent. Since March 2015, the rate had previously been frozen at the 1.5 percent mark.

The RPP said in a statement released after the rates decision on Wednesday that the central bank will continue to take the measures necessary to ensure macro stability, especially those aimed at mitigating the risk of prolonged high inflation.

The central bank may continue to intervene on the FX market to limit the Polish currency fluctuations against its main global peers, according to the Council.

The Council recognised the risks of high inflation setting in for a longer period of time, but said rate hikes should mitigate that risk and curb inflation expectations.

The RPP wrote that the Council's future decisions will depend on the incoming data on the prospects of inflation and economic activity, including the impact of Russia's armed aggression against Ukraine on the Polish economy.

The April rate hike follows a higher-than-expected CPI flash estimate of 10.9 percent, year on year, for the previous month, which some commentators cited as the likely reason for an above-consensus upward move. The recent recuperation of the zloty from the initial war-related losses was believed to have reduced the chances of 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 normalise 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 impact of the war on the CPI at 2 pps.

Rate-setter Ludwik Kotecki stated that Poland should keep hiking rates as long as it takes and by as much as it takes, and that the economy could stomach at least another 300 bps in rate hikes from the 3.50% level before the risk of recession.

In turn, fellow RPP member Rafal Sura warned against cooling the economy too much and stressed that monetary policy should focus on bringing inflation back to the target range. PAP jd md mf fbe mbn kdd