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, the Polish 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 rediscount rate from 3.55 percent to 4.55 percent was raised and the discount rate from 3.60 percent to 4.60 percent of the National Bank of Poland's lombard rate went from 4.00 percent to 5.00 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 the weakening of Polish zloty against the euro, despite the FX interventions taken by Poland's central bank and finance ministry due to market uncertainty caused by the war in Ukraine.

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. Since March 2015, the rate had been frozen at the 1.5 percent mark.

In a statement issued after the rates decision on Wednesday, the RPP said the central bank will continue to take measures necessary to ensure macro stability, especially ones aimed at lessening 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 acknowledged 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 impact of Russia's armed aggression against Ukraine will be a factor in the Council's decision on inflation and economic activity.

The April rate hike is 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, 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 estimated the impact of the war on the CPI at 2 pps.

Ludwik Kotecki, a rate-setter, stated 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 the economy is at risk of a recession.

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