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What level of inflation can we say goodbye to 2022?
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In recent months, the main economic topic in Poland is inflation. The National Bank of Poland is targeting it, and the Monetary Policy Council is conducting a series of rate hikes aimed at slowing down and slowing down the pace of growth cen. However, you have to wait a few quarters for the effects of such actions (experts say 4-6), meanwhile inflation it is the highest in this century – and continues to grow. In June, it increased from 15.6 percent. year on year, compared to 13.9 percent. in May. Inflation target NBP to 2,5 proc.
Inflation soared …
The NBP entered the interest rate hike cycle a few months later than the neighboring central banks (Czech and Hungarian), but has been continuing it since last October. At the time interest rates in Poland increased from a record low of 0.1 percent. (which was unusual in itself, because it was introduced in connection with an extraordinary situation – the economic consequences of the coronavirus pandemic) up to 6% Nowadays. In a few days, another meeting of the NBP’s decision-making body, i.e. the Monetary Policy Council, will take place. In fact, it is clear that rates should rise again. But how much and what will happen to them in the coming months? This is where it got harder.
Today, on July 1, 2022, we got to know the latest reading in June inflation. The indicator rose sharply, but to a level basically in line with expectations. The soaring inflation is obviously a motivation for the MPC to another hike, although economists are already seeing signs that the peak of price growth may be quite close. They see it, for example, by analyzing the so-called core inflation, which does not take into account the most volatile food and energy prices. “The peak of inflation (this year) is in sight. Maybe it is already now” – mBank economists write. “It is very likely that the peak of inflation is close” – these are the words of their colleagues from Pekao SA.
“We expect inflation to peak in August. CPI is likely to be around 16.5%. This is a direct result of supply chain reorganization and related material shortages. In the longer term, core inflation will start to decline. falling demand and rising inventories. In such an environment, companies will have less and less opportunity to raise prices “- believes the Polish Economic Institute (PIE), a public think tank.
A few weeks ago, PIE predicted that in July we will face the last interest rate hike in this cycle – by 50 basis points. Today he has maintained these expectations.
… but PMI dove. What will the MPC do?
Apart from the publication of the Central Statistical Office on inflation, today we also got to know other, terrible data. And while the reading of the price index itself did not surprise much, the latter, the PMI index, plunged much deeper than expected. PMI for the Polish industry fell to 44.4 points, which is the lowest level in 25 months. A reading above 50 points means an increase in activity in the sector, below its contraction. Therefore, the latest data show that the Polish industry is shrinking at a fast pace and the mood in it is very weak. It is a signal of a recession – many economists are expecting a technical recession in Poland this year (more on this in the text linked below).
You can also hear about such a slowdown, and even a recession, in the United States, for example. And this may affect the monetary policy of the largest central bank in the world, i.e. the US Fed. The situation may also change slightly in our environment. Admittedly Hungary and the Czech Republic raised the rates very solidly, but in the case of the latter, it could be a kind of last throw on the tape – the president changes at the local central bank (the new one is supposed to be a supporter of lower rates though). On the other hand, the European Central Bank, which controls the rates in the zone eurohas not even started to raise them yet and announced the first move upwards in July.
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“The situation gets complicated. Big hikes in the region have boosted expectations for the NBP. But a strong decline in the PMI is a scenario of a slowdown. In our opinion, if the MPC gives too much attention to the PMI and raises + 50bp, the PLN will lose + 75bp, + 100bp is neutral / positive for the PLN. “- the aforementioned ING BSK economists wrote today, referring to the exchange rate of the Polish currency. So: in their opinion, with a rate hike lower than by 100 basis points – i.e. solid – the zloty will weaken.
Such a move would like one of the MPC members. Ludwik Kotecki believes that the main interest rate in Poland should increase from the current 6 to 7 percent. It would then be the highest in 20 years.
Will this happen? Such a hawkish attitude (ie the vote in favor of rate hikes) does not have to find a majority in the Council, which now has eight members (there should be 10, but two vacancies remain unfilled). There are many factors that the MPC will have to take into account (such as whether the upcoming slowdown will have a negative impact on the labor market), and the Council itself was not very predictable in its decisions.
It is no wonder then that some economists are reluctant to target their forecasts at a specific point. “We will end up around 7 percent. Please forgive us for not giving a point, but the” step “in this case is very unpredictable,” mBank’s economists responded on Twitter to the question about their forecast of the target rate level. The 7 percent mentioned by them. it means, however, that in their opinion, there are still two more hikes ahead.
On the other hand, the chief economist of PKO BP believes that a hike by even 50 basis points “would be very brave”, and “every bigger one is a huge risk”.
To sum up, in July, the Monetary Policy Council will most likely raise interest rates, although it is difficult to forecast how much and whether there will be more after this move. The situation was additionally complicated by worse and worse news from the economy, which, combined with further strong rate hikes, could slow this economy down too risky.
The MPC meeting will be held on July 7.
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