Inflation in Poland has been the highest in over 21 years , similarly to record levels in many other countries of the world. In this situation, central banks are forced to tighten their policies, which may stifle economic growth, and this, given the high dynamics of price growth, means a risk of stagflation.
According to Dr. Artur Bartoszewicz from the Warsaw School of Economics, interest rate increases are inevitable, and the development of the economy should be stimulated by making it easier for entrepreneurs. The strongest positive impulse, however, would be the end of the war in Ukraine.
“Stagflation weighs heavily on Poland and the European economy, because the effects of the war disrupt supply chains, but most of all they introduce uncertainty, which will limit potential economic growth.
At the same time, the war combined with huge jumps in the prices of raw materials causes the inflationary phenomenon, which is imported to individual countries, and Poland feels this very significantly today, says Dr. Artur Bartoszewicz, an economist from the Warsaw School of Economics.
“If these phenomena are combined, we will deal with a situation in which, with high inflation, we will have low economic growth, close to 2–2.5%. This value is treated as too low to speak of real economic growth” he adds.
Poland is threatened with stagflation
Typically, inflation accompanies rapid economic growth; when the economy is hot, employers look for workers, increase capacity, tempt with higher wages, which causes unemployment to fall, consumers have more money in their pockets and consumption increases , and consumption and investment are the main components of GDP.
At that time, central banks begin to tighten their monetary policy in order to prevent a spiral of wages and prices and an increase in inflation expectations, i.e. to prevent consumers from getting used to the thought that inflation will be high. They do it through interest rate increases, currency interventions, and also verbal interventions, which is a way of communicating with the market.
Conversely, with weak economic growth, inflation tends to be low, unemployment rises, firms reduce investment, and consumers reduce spending. Then the banks lower interest rates and weaken the currency to stimulate economic growth, and the accompanying increase in inflation is not dangerous. However, it is much more difficult to get out of a situation where stagnation or economic slowdown is accompanied by high inflation.
“Stagflation is difficult to remove, so on the one hand you need to stimulate economic growth. It is possible while stabilising the socio-economic situation, and above all, the political and geopolitical situation today”, explains Dr. Artur Bartoszewicz.
“On the other hand, it is necessary to limit inflation unequivocally. The state is able to limit internal factors. This volatility, which results from the import of inflation, and especially commodity imports, may be reduced, but it takes time, diversification of supplies, finding new, cheaper sources and translating all this into lower prices of raw materials eventually reaching the market.
This takes quite a long time, so we can expect that if the economy falls into such a state, even aid programs will not be effective enough to immediately suppress this phenomenon” he explains.
Interest rates will continue to rise in Poland
The National Bank of Poland started raising interest rates in October 2021 after a flash estimate of inflation for September, which was 5.8%. y/y He did so by surprising the market with both the very fact of the hike and its size, which immediately translated into an increase in the profitability of Polish bonds.
Another hike in November was not signalled either. However, from December to February the MPC acted as expected by economists. March hike by 75 bp. was not a big surprise, as opposed to the April one by 100 bp. According to Artur Bartoszewicz, however, this is not the most important factor for the economic development of Poland.
“Economic growth will not depend on whether we increase interest rates by 100 or 200 percentage points, but on how the global and international situation will stabilise, and above all, on the prospect of ending the war at our border. If the war ends, the euphoria of the market will be so great that there will be a very strong economic growth and then the stagflation phenomenon will be less risky both at the national and European level”, – argues the economist from the Warsaw School of Economics.
In March, inflation in Poland reached 10.9%, i.e. the highest pace since 2000, while the NBP’s inflation target remained at 2.5%. with an acceptable fluctuation band of +/- 1%. We have been above the upper limit of this band since April 2021. It was the same before COVID, and only lockdowns caused the economy and prices to slow down. Therefore, interest rates will continue to rise, which was clearly announced by President Adam Glapiński in his April speech.
The zloty loan instalments increase along with the rates, although this is independent of the NBP as the loans are based on market rates, i.e. WIBOR.
“Interest rate increases are inevitable because it is a real tool to fight inflation. In parallel, the required reserves imposed on commercial banks will also have to increase.
These two tools are to cause a complete change in the market, it is important that they translate not only into an increase in the cost of loans, but above all into an increase in interest rates on deposits, because you need to withdraw money from the market, you need to curb the surplus consumption” argues Dr. Artur Bartoszewicz.
Deposits with a very low interest rate
Deposits are among the most frequently chosen saving instruments. Poles are reluctant to take investment risk, and “safe” bond funds at the end of 2021 brought losses that had not been seen in history at the beginning of this year.
Banks, however, are very restrained in increasing interest rates on deposits. This is a problem not only for consumers, but also for companies that would like their financial surpluses to work in banks, and in the situation of an uncertain geopolitical, legal and tax environment, they refrain from investing.
“It is possible to stimulate the economy on the assumption that private investment must be boosted directly. Of course, we have tools primarily located at the level of public investments, both domestic and European funds envisaged for the new financial perspective, EU funds transfer programs that will be launched, will certainly stimulate the economy.
But most of all, the burden on entrepreneurs and individuals who decide to start a business should be reduced, and such activities should be facilitated, bearing in mind that today the access to money and the cost of money will be greater” concludes the economist of the Warsaw School of Economics.