The situation becomes more complicated every month. Inflation was to be temporary first; Later she was stubborn. As the central bank changed its language, when there were assurances of a “tight” monetary policy board, expectations for inflation were turning more and more higher. And with them, peak interest rates rise. in the current session. Today, the problem has been exacerbated by the war initiated by Russia.
The last time in Poland inflation was above 10%. In September 2000, we had more than 11 per cent. in july 2000
Let us not be deceived by the minimum reading in February. The government’s anti-inflation shield succeeded, allowing inflation to drop from 9.4%. In January to 8.5 percent. a month later. But its influence has already run out. In March, fuel prices rose about 30 percent month-on-month. This will be reflected in the March inflation reading, which the Central Statistics Office will release on Friday.
How much will prices rise in March? “We have to get past 10 percent.” – Estimates by mBank economists (exact calculations to be published on Thursday). According to economists from Santander Bank Polska, the rate will be 10 percent. PKO Bank Polski analysts point to a range of 9.5 to 10 percent, and Credit Agricole Polski at 9.8 percent.
“We initially estimate an increase in inflation to 10.2% year-on-year, with a roughly 30% increase in fuel prices, and again a stronger increase in food prices and continued high core inflation” — already an indication of BOŚ economists.
We have not seen such a range of price dynamics in Poland for over 20 years. We’ll go back to 2000 levels. At that time, in March, inflation was rising at 10.3%. on an annual basis.
The average market forecast for inflation in March 2022 is 9.8%.
Supply factors are responsible for the price hike, including the aforementioned increase in fuel prices (+28% MoM). But demand factors remain strong. Retail sales in February were 16.5% in nominal terms. compared to 20 percent in January; at constant prices by 8.1%. on an annual basis. Although it is lower than in January (10.6%), it is still high. The economy has not slowed significantly yet, and this may be an argument for the MPC to raise rates again in March.
In the coming months, prices are likely to maintain double-digit dynamics, but most importantly – the problem will not disappear quickly. The March forecast from NBP shows that the central track assumes an increase in average annual inflation to 10.8%. In 2022, and if anti-inflation shields are in effect until the end of the year, and not until August as originally assumed – then average inflation in 2022 will drop to 9.1%.
The problem is that this projection may no longer be available. “Recent surprises with inflation suggest annual average CPI this year will be double digits, despite anti-inflation shields,” ING Bank Śląski economists say. In 2021, the average inflation was 5.1%.
As inflation is rising, expectations for the target level of interest rates also follow.
Recently, mBank economists updated their data – in their opinion, the MPC will raise the reference rate to 5-5.5 percent. compared to 3.50 percent currently. Until recently, this level was out of reach for most economists. Today it appears more and more in forecasts.
“Just a week ago, our expectations for the target level for Poland’s interest rates at 5.5% looked high. Moreover, the risks of these expectations were skewed towards a smaller than expected range of increases, and now we are no longer convinced. Given the financial and real risks of further easing In the coming months (for example due to necessary expenditures related to refugee support), the MPC may have to raise interest rates on a larger scale than previously seemed possible” – assessed Handeloy city economists.
In contrast, economists at ING Bank Śląski point out that Europe is waiting for a major financial stimulus to arms or a departure from Russian energy sources. In the country, there will also be living costs for refugees. “This means maintaining high inflation for a long time. Therefore, in our opinion, the level of NBP rates assessed by the target market will increase further. We also do not share the expectation of a rate cut in 2023, which is currently priced by the yield curve. “. In their opinion, interest rates in the years 2023-2024 may be in the range of 5-10 percent.
The mismatch between fiscal and monetary policies seems to be growing all the time. “Inflation is becoming more and more difficult to stabilize. According to our estimates, the total size of tax cuts and spending increases announced over the past 12 months is about PLN 145 billion, or 4.8% of GDP. The size of this fiscal stimulus would be very large, even in State of the economy However, the Polish economy is not stagnant, but is closer to the point of overheating – domestic demand is growing at a double-digit rate, while inflation is approaching 10% Prices and a deterioration in the current account, rather than stimulating the economy, warned economists at City Handlowy.
This mismatch may translate into higher interest rates, which investors seem to be beginning to discount – FRA contracts have already crossed 6%. this year.
“A strong GDP growth scenario and high inflation would mean further increases in NBP rates, perhaps over 6% this year” – ING economists emphasized.
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