Poland’s Central Bank Interest Rate Hiked to 2.75% from 2.25%

February 8, 2022

The Monetary Policy Council at the National Bank of Poland announced its fifth rate increase since October when the reference rate was languishing at a mere 0.10%. Most central banks around the world have been switching priorities, putting more emphasis on containing high inflation, or to put a finer point on it, ensuring that medium-term inflation expectations stay aligned at target and that actual inflation settles back to target as well. The challenge is to accomplish these goals without, if possible, creating a recession in the process. That balance will be easier said than done because of continuing pandemic-related uncertainties and because the unique circumstances that produced the current spike in inflation obscures the reaction of inflation and aggregate demand to the withdrawal of monetary accommodation. While there is wide agreement across central banks about the task at hand, monetary authorities differ considerably about the optimal timing and mix of policy changes to get the job done. Some like the European Central Bank and Bank of Japan prefer a patient and gradual approach. Others like the Federal Reserve are relying on forward guidance to avoid surprising investors and while willing to tighten more frequently seems afraid to raise interest rates in increments greater than 25 basis points, which for a long time has now become standard operating procedure during rate upswings.

And then there are quite a few monetary authorities like those at the National Bank of Poland, who aren’t going to mess around. With inflation spiking so much higher than anticipated — 8.6% in Poland presently — and the causes of the spike still very much in play, the NBP Council doesn’t want to allow itself to appear behind the curve for a long time further. Shipping, energy and agricultural costs remain quite elevated. Global supply chains disruptions aren’t fading, and end-2021 ended with aggregate demand in Poland picking up momentum as attested by falling unemployment and accelerating growth in jobs and wages. Real GDP rebounded 5.7% in 2021, and officials are confident that Poland’s expansionary business cycle can handle the front-loaded rise of interest rates (including three straight 50-basis point hikes since December). Regarding the future, today’s communication from the central bank, which today also lifted its required bank reserve ratio to 3.5% from 2.0%,  lays out the following thinking:

The Council’s assessment regarding the total scale of monetary tightening necessary for achieving these goals will consider incoming information on perspectives for inflation and economic growth, including situation in the labor market. Zloty appreciation would be consistent with the direction of monetary policy conducted by the NBP. NBP may still intervene in the foreign exchange market and use other instruments envisaged in the Monetary Policy Guidelines. The timing and scale of the measures taken by NBP will depend on the market conditions.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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