“In order to limit the scale of the zloty depreciation and its pro-inflationary impact, the Monetary Policy Council will have to tighten the monetary policy more strongly” – forecast Credit Agricole analysts. In their opinion, we will have three more interest rate hikes this year.
In the latest weekly comment, economists emphasise the impact of the change in the attitude of the world’s major central banks on monetary policy in Poland. “When making decisions on the level of interest rates, the MPC must take into account the differences between their levels in Poland, the US and the euro area” – they note. In recent weeks, the Fed and ECB authorities have changed their rhetoric to more hawkish.
3 more interest rate hikes in Poland
According to Credit Agricole analysts, the ECB will raise interest rates by 125 bp this year, and next it will make two more increases, raising the reference rate to 1.25 percent. In turn, the target for the fluctuation of the Federal Reserve funds rate is 3.5-3.75 percent. at the end of 2022 Experts believe that the authorities of the euro area central bank will complete the monetary policy tightening cycle in June next year, and the Americans – already in December this year.
The more restrictive than previously expected policy of the world’s major central banks means that the difference between the cost of money in the US or the euro zone and Poland is getting smaller. And this means pressure on the zloty exchange rate. Analysts forecast that at the end of the year the euro exchange rate will reach PLN 4.62, and a year later: PLN 4.55.
The strength of the domestic currency is an important element influencing the decisions of the Monetary Policy Council. “Within the monetary policy transmission mechanism, three main channels of influence can be distinguished: the interest rate channel (transmission of reference rate increases to deposit and lending rates in commercial banks, as well as to bond yields and equity prices), the credit channel (the propensity and ability of commercial banks to lending, and thus the supply of credit) and the exchange rate channel (strengthening of the zloty) “- experts explain.
“According to the results of research on monetary policy transmission, the maximum response of core inflation is caused in about one-third by the effects of the interest rate channel and the credit channel, and in two-thirds by the effects of the exchange rate channel,” they point out. Interest rates on inflation are currently closed as the zloty is weakening despite monetary policy tightening. We believe that the interest rate transmission channel will remain largely obstructed also in the coming months, which is consistent with our revised forecast of the EURPLN rate, “they add.
“In order to limit the scale of the zloty depreciation and its pro-inflationary impact, the Monetary Policy Council will have to tighten the monetary policy more,” say Credit Agricole analysts. In their opinion, the Council will raise interest rates at three consecutive meetings: in July by 75 bp, and in September and October by 50 bp each. Then the monetary policy tightening cycle – after 12 hikes in a row – will be completed and the NBP reference rate will increase to 7.75%.
Has change their forecast
Earlier, Credit Agricole experts expected that the MPC would stop at 7 percent. While justifying the change in the forecast, analysts indicate – apart from the change in the attitude of other central banks – the impact of credit holidays.
“According to the calculations of the Polish Bank Association, in the event that 80% of eligible borrowers would take advantage of credit holidays, the total cost for the banking sector would reach PLN 13.1-16.4 billion in 2022 and PLN 21.3-27.9 PLN billion in total in the period 2022-2023 “- they indicate. “These measures will provide additional income for households, which will support consumer demand and contribute to an increase in inflation,” they say.
However, analysts see factors that may prevent interest rates from rising so strongly. “The main downside risk to our revised interest rate forecast is the impact of disruptions in gas supplies on the economic situation in Germany and the euro area, including the possibility of a recession in these economies,” they say.
“It is also an upward risk factor for the EUR/PLN path. We believe that the potential scenario in which we will observe a higher EUR/PLN path and a lower path of rates than our expectations will be accepted by the MPC due to the significant downward risk for economic growth. in 2023 ” – the economists Credit Agricole conclude.
We will see if the expects will be right or not regarding the interest rate hikes.
Source: Bankier
