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For the first time in years, the fate of interest rates has been weighed. What about the zloty?

7 Nov 2017 11:06|Marcin Lipka

"The last time interest rates in Poland were raised was more than 5 years ago. Will fast-growing wages, increased inflationary pressure and about 4% economic growth be sufficient reasons for the Polish Monetary Policy Council to change its attitude and suggest an increase in the cost of credit before the end of 2018?” writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

For the past several quarters, most of the Polish MPC members signalised for interest rates to remain unchanged until the end of 2018. However, the situation in the Polish economy and its surroundings has been changing dynamically, and some representatives of the MPC have started to suggest the possibility of earlier monetary tightening in the past few weeks. Is it a good time to announce the change in Polish MPC attitude? Wednesday's Council meeting is promising to be a fascinating event.

Pressure made by wages

In November, apart from the standard Council statement and a press conference, the latest macroeconomic projection of the National Bank of Poland (NBP) will be presented. In its recent statement (from July), inflation did not exceed the 2.5% limit until the end of 2019 (the Polish MPC goal). Now, it is likely that these estimates will be revised upward.

In the Polish economy, wages are growing strongly. Their average growth in the enterprise sector exceeded 6.0% YOY over the last two months, this is the first time since 2008. According to the Eurostat data for Poland, hourly wages rose in Q2 this year by 8.3%, even faster than average growth. This has been the highest pace for almost a decade.

The increasing labour costs are also noted by the Council representatives. "I am concerned about wage pressure, we will know more in November. As wage pressure will continue to persist, bearing in mind the MPC's period of influence, perhaps a decision to increase interest rates will have to be taken earlier than it is currently communicated," said Jerzy Osiatyński on October 20th, quoted by the Polish Press Agency (PAP).

On the same day, another member of the Council, Jerzy Kropiwnicki, also spoke about the growing inflationary pressure related to wage demands. Interestingly enough, a month earlier Kropiwnicki claimed that, on the basis of the available data, he did not see any reason to revise the level of rates within the next 24 months, stating that "this statement may change with the inflow of further information, especially in November "(quotation for PAP).

Higher commodity prices, rapid GDP growth

While monetary authorities are trying not to pay more attention to commodity prices (external, often transitory, factors), the increase in their costs over time also accelerates inflationary pressure across the economy. Since July's NBP forecasts, the index of prices of industrial metals (copper, aluminium, lead, tin, zinc, nickel) on the London LMEX exchange market has increased by 20% and has been at the highest level for over 4 years.

Oil prices also increased significantly. Since the middle of the year, Brent oil's price has risen by almost 30%, clearly breaching the limit of 60 USD, reaching at the same time the highest levels since May 2015. This element should also cause an increase in the probability of exceeding the inflation target within the NBP forecast horizon.

It is also worth noting that the first two quarters of the year were characterised by the economic growth of 4% YOY. In the third quarter, GDP accelerated to 4.5 YOY (surveyed by Bloomberg), according to the economists' consensus. This is probably much higher than the Polish economy's potential (by about 1.0-1.5 percentage points). Such rapid growth increases the risk of overheating the economy and can cause additional inflationary pressures. As a result, it is also an argument for the Council to change its attitude from neutral towards one that will begin to suggest an increase in interest rates in the next two to three quarters.

A perfect moment? Pressure on the zloty

The recent opinions' modification by two members of the Polish MPC (Kropiwnicki, Osiatynski) increases the chance that they will join three other representatives (Eugeniusz Gatnar, Łukasz Hardt, Kamil Zubelewicz) of the Council, who have been suggesting for a long period of time an increase in interest rates earlier than consensus.

A more symmetrical opinion distribution among the Polish monetary authorities should lead to a change in the statements after the MPC meetings. They may suggest that it is more likely to tighten the monetary policy in a scenario of increasing inflationary pressure. Wednesday's meeting, taking into account new macroeconomic NBP's forecasts or external factors, may, therefore, be an ideal time for bigger changes in the Council's message. If this scenario is fulfilled, it would also send a positive signal to the Polish zloty, which could bring the euro's valuation to around 4.20 PLN, and the franc to below 3.62 PLN, i.e. to the lowest levels since the second half of January 2015.


7 Nov 2017 11:06|Marcin Lipka

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