Hike rates

Polish central bank to raise rates by 50 basis points | Instantaneous

We see recent statements by Monetary Policy Council hawks Eugeniusz Gatnar and Łukasz Hardt as important guidance for the January meeting. Both suggested a 50 basis point hike, indicating that a larger move is unlikely. Additionally, Governor Adam Glapinski said after the December decision that subsequent moves should be of a magnitude comparable to December’s (50 basis points). This is also reinforced by the uncertainty over the economic impact caused by Omicron, which should affect economic activity, but only in 1Q22. Given a relatively low vaccination rate (55.3% compared to the EU average of 70.3% fully vaccinated), Poland appears vulnerable to the most contagious variant of Covid. Also, since the January MPC meeting has been moved earlier (January 4), the MPC will not see the December CPI printout in advance.

We estimate 4Q21 GDP to grow around 7% YoY

Data released since the December meeting is adding upward pressure on the CPI in the short and long term. November activity data surprised on the upside and we also see strong production and exports (minus retail sales) in December. So overall, 4Q21 GDP is expected to be very strong despite the simultaneous spike in new cases in the fourth wave of the pandemic – we estimate 4Q21 GDP to grow by around 7% year over year. another versus 6.5% YoY that we and the NBP were previously expecting. The main consequence of the resilience of GDP in 4Q21 is that companies can easily pass on rising costs to retail prices.

And there is so much to do here. Regulated tariff increases (for households) published in December surprised on the upside, notably the new gas tariff (54%), while electricity price increases were in line with our expectations (24%) . Inflation shields, introduced by the government, are expected to limit the CPI spike in January (effectively spreading gas and electricity price increases between January and April or subsequent months given the likely extension government’s anti-inflation measures). Nevertheless, the average CPI is expected to be higher in 2022-23 than previously expected. Gas and electricity prices for businesses are not regulated, but businesses still expect new prices to be introduced in January and these can be easily passed on.

The wage-price spiral is expected to translate into very high underlying inflation, rising from around 4.1% yoy in 2021 to around 5.1% yoy in 2022. We expect double-digit wage growth in 2022-23. The labor market is already very tight, while regulatory and tax measures will only increase wage pressures (e.g. further sharp rise in the minimum wage, increase in effective tax rates for high earners under the Polish agreement). This configuration makes Poland one of the main candidates for second-round effects.

We see the 2022 CPI at 7.7% YoY

Taking all the above factors into account, we see the 2022 CPI at 7.7% YoY (vs. 6.7% YoY) compared to 5.1% in 2021. In 2023, the CPI should gradually subside on base effects at around 5% YoY, but also here we see a higher CPI trajectory than previously expected (ING’s previous forecast for 2023 at 4.2% YoY , November NBP projection for 2023 at 3.6% YoY). Inflation is expected to stay above the NBP’s upper target range (3.5% yoy) for much longer than the NBP had expected when it released the projection in November.

Given the strong GDP performance in 4Q21, but more importantly, the long period of CPI remaining above the upper bound and the risk of long-lasting second-round effects (from the current second wave of shocks supply and the expected wage price spiral we see in 2022) we are raising our terminal rate forecast to 4% at the end of 2022 and 4.5% at the end of 2023.

The January MPC meeting will be the last for two Senate-appointed MPC members. At the end of January, two out of three senators are expected to leave, namely Eugeniusz Gatnar (hawk) and Jerzy Kropiwnicki (swing vote). They will be replaced by new candidates, namely Ludwik Kotecki and Przemyslaw Litwiniuk, who will be appointed on January 12. We believe that new members of the MPC should show a similar bias to those leaving their position (Ludwik Kotecki said the NBP should follow the Czech central bank). The third Senate candidate, Joanna Tyrowicz, is expected to replace incumbent Rafal Sura by November 2022 at the latest. She should have a more warmongering bias than Sura.