The price level in Poland has been rising steadily for five months. In February, in annual terms, the price increase was only 0.7 percent. According to the latest July estimate of the Central Statistical Office, the price increase by 2.9 percent year over year. This is the highest inflation rate since the end of 2012.
According to the data, the highest price increase was recorded in the category of food and non-alcoholic beverages, as much as 6.8 percent in relation to July last year. The energy prices dropped by 1 percent, and fuels for private transport increased by 0.7 percent. Reading at 2.9 percent was above the market consensus, which was at the level of 2.6 percent. Can faster and faster price increase affect the Monetary Policy Council and the Polish currency?
The inflation target of the National Bank of Poland is set at 2.5 percent. with a possible deviation of 1 percentage point up or down. Thus, the current level of inflation is above the target, but nevertheless, the MPC downplays the rise in prices, saying that monetary decisions do not affect food or energy prices. Nevertheless, the Monetary Policy Council's decisions affect the rate of return on the savings of Poles, which are decreasing at this point by rising inflation, as negative real interest rates are increasing. Let's look at the expectations of inflation and interest rates in Poland for the next quarters.
According to surveys carried out by Reuters, the largest price increase in the Polish economy is expected to occur in the first quarter of 2020. At the same time, it is estimated that inflation will be at the level of 3.3 percent. However, from the second quarter of 2020, it will start moving within the range of 2.7-2.9 percent, thus still above the central bank's target. Meanwhile, estimates of the level of the main interest rate show that it may rise to 2 percent in 2022.
On the one hand, the whole world is heading towards a global easing of monetary policy, which the MPC would probably like to do, lowering the financing costs of the country (lower bond yields), lowering loan installments and maintaining solid economic growth, and, on the other, increasing inflation could require thinking about the rate hike.
Therefore, the base scenario is currently the lack of changes in interest rates in Poland despite growing inflation, which may be beneficial to the zloty with global monetary easing. It may be affected by the interest rate difference between Poland and other countries, including the euro area.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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