In September, the Federal Reserve and other developed markets' central banks took even a stricter stance to curb inflationary pressures. At the same, in the CEE3 rate hikes, cycles have been most probably drawn to a close. The National Bank of Poland was unfazed by the latest shocking inflation numbers and the zloty weakness and decided to stay put, keeping rates at 6,75 pct. The forint remains in freefall despite MNB raised rates to 13%, whereas the Czech koruna acts as a regional safe haven as the CNB started massive currency interventions back in May.
On Wednesday, the Polish Monetary Policy Council refrained from the twelfth interest rate hike in the cycle. The reference rate was kept at 6.75 pct.
Surprisingly high inflation not enough to trigger action
Interest rates in Poland were cut to 0.1% in the pandemic. Last October, when it became clear that rampant inflation would be more pressing than protecting the economy, increases in the cost of money began. These were accelerated by Russia's invasion of Ukraine, which triggered a spike in energy and food commodity prices.
Over the past weeks, there have been signals from the Monetary Policy Council that an end to the cycle is being considered or a pause in anticipation of the November NBP projection, showing how quickly price pressures should die down. Unfortunately, price rises are still hitting the economy today and are reflecting a kind of inflationary hiccup. Entrepreneurs are passing on business cost increases to consumers, as the still strong labour market makes possible. As a result, consumer inflation in September reached 17.2% year-on-year in Poland and was the highest since 1997, with core price dynamics approaching the 11% year-on-year ceiling.
This supports the view that it will be challenging to bring inflation under control and that it will take a long time to bring it down to the NBP's target (2.5 +/- 1 pct.). In the eyes of most economists, the unpleasant inflation surprise had tipped the scales in favour of continuing the tightening cycle as the hopes for a summer peak in inflation turned out to be misplaced. Nonetheless, monetary authorities remained unimpressed by the latest developments and stuck to the belief that inflationary pressures will abate.
The zloty on the ropes - another argument for a rate hike
Keeping rates unchanged threatens the zloty. The EUR/PLN exchange rate ended September at around 4.85 PLN. End-of-quarter quotations have never been so high. In the past few days, the franc and the dollar cost well over 5 PLN and were the most expensive in history.
The lack of any puts additional pressure on the zloty as major central banks tighten and raise rates sharply. The Federal Reserve has raised them by 75 basis points three times in a row. The European Central Bank ordered a hike of the same magnitude in September, and the fact that inflation in the euro area has reached 10% for the first time in history foreshadows a repeat at the meeting at the end of October.
CEE3 lesson: it is risky to announce the end of the cycle
The Monetary Policy Council was the last in the region to start raising interest rates but most probably not the last to finish. Last week's sharp increase of the key rate from 11.75 to 13% in Hungary, which was accompanied by a declaration of an end to the tightening cycle, looks like the last move in the region. The situation may change, however, if the next NBP's inflation report, which is due next month, points to sticky and persistent inflation.
The Czech central bankers had finalised the cycle at the 7% ceiling in June but have been conducting intensive currency interventions since spring. In the first three months, they amounted to 20 billion EUR. To date, foreign exchange reserves, which at the beginning of the year were among the largest in the world in relation to the size of the economy, have melted by at least a dozen per cent. Thanks to them, the krone was immune to market turbulence in the third quarter and even gained marginally against the euro. At the same time, the zloty lost around 3% against the single currency, while the forint depreciated by more than 6% and regularly deepened its historical lows.
Even at the start of the fourth quarter, despite a dramatic improvement in investor sentiment and a massive retreat against the dollar, the EUR/HUF is above 420.00, which means it is practically the highest it has ever been and more than 5% above the high of the sell-off in CEE3 currencies after Russia attacked Ukraine. The zloty lost ground after the announcement to stay put as well. This situation could be a valuable lesson for other emerging market central banks struggling with record inflation, deep current account deficits and currency weakness. Even refraining from hiking, without closing the way while leaving the door open to further increases, is now better received than an aggressive culmination of the cycle.