Inflation spurs rate hike in Poland

Warsaw, Oct 11: Raise interest rates to curb inflation or keep them low and risk higher inflation, but maintain fragile growth: That is the question for bankers and politicians in Central and Eastern Europe (CEE) as the economic impact of the pandemic wears off. Richer countries further west face the same dilemma, but have largely avoided it thus far.

Brazil and Russia have been hawkish, upping rates several times this year, while doves, including Turkey and Poland, had been pushing for growth. Adam Glapinski is head of the National Bank of Poland (NBP). Raising borrowing costs would be "very risky," he said recently.

But that changed last week when the NBP joined central banks in the Czech Republic, Hungary and Romania in raising interest rates, for the first time in 9 years, from 0.10% to 0.50%. The Czech and Hungarian central banks started their own tightening cycles in June, while Romania raised rates a day before Poland. The Czech National Bank (CNB) raised its main interest rate by 75 basis points, its biggest hike since 1997, and said more rate rises would follow.

Inflation fears

Consumer prices grew considerably in countries where the economic rebound was faster between the third quarter of 2020 and the second quarter of 2021, S&P Global Ratings' lead economist. Tatiana Lysenko, told Reuters. She marked out Poland, Hungary, Russia and Brazil.

Central Europe is facing some of the highest inflation rates in the EU. Poland's inflation hit a 20-year high of 5.8% in September, above the central bank's target range of 2.5% plus or minus one percentage point. The central bank"s inflation outlook, published in July, is 3.8%-4.4% in 2021.

"What the bank underestimated was the increase in energy prices due to a 12.4% rise in natural gas prices for households," ING bank said in a statement. Benchmark European gas prices have risen by over 300% this year. Energy and utilities make up a large share of CEE countries" inflation baskets and their electricity supplies are more exposed to carbon-intensive sources, i.e. coal.

The rise in inflation was also due to global supply delays and increasingly from rising domestic demand and tight labor markets, the bank said. Global food prices are also near their highest level in a decade, according to a key UN index.

"The rise in global prices for both energy and agricultural commodities seen in recent months may still increase price growth in the coming quarters," the central bank"s statement said.

The Office for Investment and Economic Cycles (BIEC), a Polish economic think tank, said there were no signs of inflationary pressure dropping off in the near term.

"Since the beginning of the year, in every monthly study, almost 90% of polled households believe that in the coming months prices will rise, of which one-third assert that they will rise faster than to date," said the BIEC in a report.

The report added that inflationary expectations among industrial sector management are now at their highest level since 2004 and 20% more companies plan to increase prices in the near term rather than cut them.

More to come?

The bank will review new inflation and GDP projections at a sitting in November, which will be vital for the course of Poland"s monetary policy.

The bank had said a move away from loose monetary policy could happen as soon as Poland"s post-pandemic economic recovery was sustainable. In March 2020, the Monetary Policy Council (RPP) of the NBP cut the mandatory reserve rate from 3.50% to 0.50%, and GDP fell 2.7% in 2020, picking up again to over 5% growth this year.

According to analysts, this may not be the end of the rate hikes.

"The key question is whether this is an introduction to further regular hikes, or after this decision there will be a break," Piotr Bielski, director of the economic analysis department of Santander Bank Polska, told news agency Reuters.

"In our opinion, high CPI readings for November and December will be deciding factors here. We expect that at the end of the year, CPI inflation in Poland may approach 6%," ING said in the statement.

Analysts at mBank said the rate move was likely the start of a cycle. "We are more inclined to think that the entire monetary tightening will be concluded by the end of 2022. The scenario of +50 basis points in November, +50 bp in March... is not at all implausible," they said.

Source: DW