Bartosz Bednars, Entrea: Today’s monetary policy board finds a number of arguments to continue tightening monetary policy?
Grzegorz Maliszewski, chief economist at Millennium Bank: – NBP must act decisively, first of all to counteract the decoupling of inflation expectations, but also to stabilize the zloty and support a drop in inflation to the NBP target in the medium term. The fact that inflation is partly caused by external energy shocks does not change the fact that the demand factor plays an increasingly important role in inflationary processes. And more so because fiscal policy is still expansionary. Therefore, monetary policy must be tightened so as not to create a spiral in wage prices and to support the value of the Polish currency.
Where is the upper bound for the major NBP rate today?
Determining the target level for the reference price is subject to a great deal of uncertainty, but it should be assumed that it will be clearly higher than it was before the outbreak of the epidemic. Interest rates will return to their levels since 2013, and I assume in the current cycle of increases they will reach the 4% level. The direction of changes in interest rates next year is determined by inflation, which will remain above the target NBP for the next two years. Even if he began to decline, incl. The primary effect, it will remain above the NBP target, the greater the demand pressure and the financial component will remain strong.
This trend of monetary tightening is evident in Central and Eastern Europe.
– Against the background of the region our council warned. They started raising rates later and have been raising rates more slowly than other central banks in our region. This is reflected, inter alia, in in weak zlotys. These delays, in my opinion, could mean that the target reference rate would have to be higher than it would have been in the scenario if action was taken earlier. In addition, we can talk about a decline in the credibility of the Central Bank – NBP for a long time preferred the weak zloty, even at the end of 2020 it worked to weaken the currency and for a long time underestimated the risks of inflation. In September last year, the governor of NBP said that inflation is temporary and there is no need to raise interest rates. In my opinion, illegible communication and lower transparency of NBP communications have lowered the bank’s credibility, which means that the MPC may influence the inflation outlook verbally to a lesser extent. I believe that the Central Bank communication can also be an effective tool for managing inflation expectations, while our Monetary Policy Committee, due to a loss of credibility, may use this tool less effectively than, for example, the Czech Central Bank.
There, interest rates are much higher than in Poland.
– There are higher expectations for short-term rates, but expectations for the medium and long-term are already lower than in Poland. Bond yields with a maturity of 10 years are lower than in Poland. In Poland, the profitability of “ten-year-olds” is 3.80 percent. 5-year bonds are already 4 percent. In the Czech Republic, the yield on a 10-year bond is around 3%. It seems that the belief that inflation is temporary is greater there. As a result, inflation in the Czech Republic may return to target faster.
Interest rates in Poland will rise to 4 percent. With a plus sign as indicated by the market?
– I suppose the prime rate. It will rise to 4 percent. At the end of 2022 in order to influence inflation expectations and bring inflation down to the medium-term target, interest rates must rise significantly. The MPC’s steps must be decisive – the increase in the NBP rate to around 3%, expected until recently. This is likely not enough to bring inflation down to NBP’s target in the medium term. Real rates will remain strongly negative. If expansionary fiscal policy is maintained and the zloty is weak, this will not lead to lower inflation. I do not rule out that the Council will quickly reach 3.50% in the coming months, after which it will give itself some time to notice the impact of the measures taken. To what extent the MPC will raise interest rates will depend on the situation in the labor market and the formation of wage expectations. It will be critical to the expected medium-term inflation outlook. If there is stability – the cycle can be stopped at 4%. For the key rate if there is a deconstruction of expectations and wage pressures – there is a risk that the increase in the key rate of NBP will be higher.
When does inflation stop?
This question is subject to a great deal of uncertainty, if only because we do not know how long the anti-inflationary shield will be in place. There are government announcements that it could be extended, but we don’t know for how long. This will determine when we reach the peak of inflation in Poland and the moment when it begins to decline from it. I suppose the target will be extended for the entire first half of 2022. Then we will reach peak inflation in July. In such a situation, in the second half of this year, inflation will begin to decline. The rollback will be relatively slow. It is positive that the second half of the year will lead to a slowdown in price growth, while these levels will remain high, well above the central bank’s target (2.5% +/- 1% – liberated).
The base effect will work.
– The primary effect will help, mainly in the raw materials market. Fuel price inflation will slow from double-digit levels (currently above 30%) to single-digit levels – it is hard to assume that oil prices will grow at a similar pace as before. This fuel component will reduce inflation, but on the other hand, core inflation will remain high. There will be no room for strong dips here. Demand pressure is high and in the coming months companies will pass on the rising costs of their operations to consumer prices. This is indicated by the results of business climate surveys, as components that reflect projected prices remain at high levels. Rising gas and energy costs will liquidate the remaining items of the inflation basket, including essential items.
Will the structure of inflation in Poland change?
– While these supply factors will contribute to inflation to a lesser extent, and in the second half of the year will even begin to reduce it, this does not mean that the inflationary pressure in the economy will weaken. Demand components will keep core inflation at high levels.
The supply factor will gradually disappear, but the demand inflation will remain. Energy prices will rise steadily because this is a long-term trend. It will not stop. Although gas prices should fall in the spring – these are their seasonal peculiarities. However, this should not have a significant impact on retail prices, because the increases for 2022 are already included in the tariffs.
Before we see a drop in inflation, we first have record readings for this indicator ahead of us. In December, it will exceed 8 percent. With a big plus (flash indicator posted on Jan 7th)
– I assume that the inflation rate in December will reach 8.2%. In recent months, we have crossed new psychological limits, first 5%, then 6, 7, and now 8%. Risks still faced.
So it may be higher than 8.2 per cent.
– There is a risk that inflation will surprise again in December. Especially since the pre-holiday period can lead to higher price adjustments. In the first months of 2022, inflation should stabilize, and may decrease slightly due to the effect of the anti-inflation shield. After it is quenched – it will increase again. Energy carrier prices will rise as well as fuel prices. The question is when this will happen. Whether it’s May, July or maybe August depends on the government’s decision. Of which, among other things, there is uncertainty about when we will reach peak inflation, but it may be around 9%. From that moment on, I expect a slowdown in price dynamics.
We don’t know exactly how large the anti-inflationary shield will reach in the coming months.
– This is the uncertainty factor. We have an option to lower VAT on food, but we don’t actually know when and for how long it will apply. It should also be remembered that the anti-inflationary shield does not essentially eliminate the sources of inflation, but rather mitigate its effects and reduce the peak of inflation, without which it would certainly be at a double-digit level. The sources of inflation, as I mentioned before, are an energy shock, higher commodity prices, and strong demand, which gives companies room to pass on costs to consumers. In addition, expansionary fiscal policy, especially the Polish system, the zloty is weak.
We have entered the new year with increases all around. It’s not really about keeping inflation low. Poles inflation expectations soared?
– Inflation expectations certainly rose after the increase in current inflation readings. Inflation is being noticed more and more, and consumers are increasingly commenting on it. There is no doubt that inflation is becoming more and more entrenched in the social consciousness, which can be seen in discussions and trends at Google. Inflation is being sought at a similar frequency to 2004, when we joined the European Union, and there were fears that it might cause a sharp adjustment in prices. Have they already been deconsolidated? There is a risk that this process has begun to some extent, because the dynamics of increasing wages and the increase in wage demands are evident, which is indicated by employers. We see increased readings of inflation expectations – they are strongly adaptive, that is, they follow rising inflation. It is difficult to say whether or not inflation expectations have been decoupled, but it is a risk that must be taken seriously. The more the situation in the labor market is very good.
Poles fear inflation will increase consumption?
Eurostat data for the second quarter of 2021 shows that the savings rate has returned to pre-pandemic levels. Post-lockdown surpluses have already been largely consumed. This decline in the savings rate in Poland was faster than in other EU countries, which was reflected in the economic results of the previous year. It also suggests that consumption dynamics should slow this year. This item of backorder is running out.
This is also an effect that does not help contain inflation.
– The accumulation of goods by consumers in conditions of high inflation – this is the thesis that intensified after November, when the dynamics of retail sales surprised to the upside. It is definitely visible in companies. Companies have been very aggressive in increasing their inventory. It was associated with rising commodity prices, but it also resulted from supply problems. The expected increase in the prices of raw materials and supply problems have led to an increase in the demand for intermediate goods. The contribution of inventory changes to GDP growth in the third quarter of 2021 alone was 3.7 percentage points. For households, high inflation lowers real income and consequently consumption will decline in the medium term. Also due to the fact that interest rates will continue to grow.
When can NBP go back to cutting rates?
– I think the possibility of lowering interest rates. Drawing will start in 2023. We assume that inflation will return to target in early 2023/2024. We are now in a situation of intensifying inflationary pressures and their surprises in the excess wave – the price increases that have been accumulating throughout 2021 materialize. In the middle of the year we are likely to pass the peak of inflation, and the economy will begin to slow down, including consumption. Poland’s GDP will continue to grow, albeit at a slower pace. The possibility of a rate cut will begin to appear. When can they happen? It all depends on what inflation expectations and wage growth will look like. For now, the prospects for cuts look remote, but they will come closer as inflation begins to decline.
– The level of interest rates that I expect in this monetary tightening cycle, ie 4%, is not a normal level for the Polish economy. This is just a response to rising inflation. In the long term, the reference rate should return to 1.5-2%.
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