Polish central bank hikes interest rates by 100 points

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Polish central bank hikes interest rates by 100 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 expected half of the increase.

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 increased 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.

Due to market uncertainty caused by the war in Ukraine, the RPP's decision has resulted in a 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, 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. The rate had previously been frozen at the 1.5 percent mark since March 2015.

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

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

The Council recognised the risk 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 data pertaining to the prospects of inflation and economic activity, as well as 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 the developments, the 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.

Ludwik Kotecki, a rate-setter, said that Poland should keep hiking rates as long as it takes, and by as much as it takes, arguing that the economy could stomach 300 bps in rate hikes from the 3.50% level before facing a recession.

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