After the MPC’s decision, whistles mingle with applause. Inflation can live a life

6.75 percent – that’s still the reference rate NBP. The Monetary Policy Board decided at its meeting on Wednesday for the first time in a year not to order a rate hike. What is more, I made it clear in the meeting between the linesThat it could be the end of the rate-raising cycle, not just a break (although the MPC of course stresses that it will monitor the state of the economy and react on an ongoing basis).

Certainly, NBP Chairman Adam Glapinsky will tell more about the MPC’s plan for the coming months and quarters at Thursday’s press conference (starts at 15:00).

The decision should be considered a delicate surprise. “Surprise” because, however, is still rapidly growing both major indicator inflation (17.2% in September), as well as core and super core inflation (which gives a picture of how inflation is spread and rooted in the economy). Only one of 18 analysts polled by Reuters expected no increase (as many as 15 were betting on a 25 basis point increase).

But “sensitive”, because both President Glapinsky and some other members of the Monetary Policy Committee have expressed in recent weeks little intention to raise interest rates, stressing the risks of further monetary tightening of the economy.

Interest rates are unchanged. Glabinsky’s “Sopot Treaty” has been preserved

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Powerless rates against inflation?

Is the path taken by the Monetary Policy Committee correct? As usual – how many economists, so many votes.

On the one hand, some analysts, economists, and experts argue that since the MPC has raised interest rates 11 times over the course of the year, and inflation continues to rise (worldwide), it must be fought in a different way. In short – why do you “kill” the economy more (high interest rates slow its growth and increase the risk of recession), because inflation does not fall from that (because its main sources are elsewhere than on the demand side, which is affected by NBP rates). Or at least – it hasn’t fallen yet, as increases are assumed to affect the economy after a few quarters.

this channel [podwyżki stóp – red.] Its effectiveness is limited, which largely indicates the “virtue” of this crisis. It is time, at last, with a delay of a year, to address the power and profits of the monopoly

– writes co-chair of the Polish Economic Network Jan J. Szygmontowski.

Although there is a counter-argument – for example, the effectiveness of the monetary policy effect in the MPC is reduced by too little previous determination by the MPC to raise interest rates (the fact that previous rate increases were too small convinced, among other things , MPC members Ludwik Kotecki and Joanna Tyrowicz – but their opinion is in the minority), as well as the low credibility of NBP President Adam Glapinski. (This is how Tyrowicz evaluates it.)

Overall, however, most MPC members are convinced (expressed in the statement after Wednesday’s meeting) that increases to date, combined with the expected slowdown in the economy, will do the trick and inflation will eventually fall to the NBP inflation target. (2.5%), although this return will not be quick.

However, there are many risks associated with this belief, warns Ignacy Morawski, chief economist at Puls Biznesu.

Inflation can live a life of its own even when the economy is in recession and is not using its productive capacity. This happens if inflation expectations are high. And they can be with us. (…]Today’s decision is based on the hope that expectations will stabilize. We will see

Murawski writes.

Also ING . Economists Bank Olensky warns that expecting the economic slowdown to increase so far and that the slowdown will solve the entire inflation problem is a “risky strategy.” They add that “while in 2023 inflation will drop from 20% to less than 10%, in 2024, when the shields are lifted, inflation will bounce back.”

We are going to tighten policy again in 2024 – either raise interest rates or tighten fiscal policy. The ultimate costs of fighting high, long-term inflation will be higher than if we “push” prices down now

– they think.

Raffaei Beneke, chief economist at ING Bank Śląski, recently spoke in a similar vein in an interview with Gazeta.pl.

The experience of the 1970s and other years of monetary policy implementation shows that in order to stabilize inflation expectations in society, a very strong fixing of the central bank is needed, focusing on inflation and raising interest rates to the detriment of the economic situation. Neglecting the element of inflation expectations is a recipe for many years of high inflation

– The economist cautioned: In such a scenario, the costs of fighting inflation will ultimately be much higher than belt-tightening in the short term.

Matthews Urban, an economist at Oxford Economics, also criticizes the MPC for its lack of resolve.

The MPC statement looks more like a declaration of belief that inflation “by itself” will return to a target than a real will to work towards that target. We break the cycle of increments when inflation grows >1%. From month to month the zloty is at historical lows. This is a mistake. If we don’t raise interest rates, the MPC should toughen rhetoric. You can’t have a cookie and eat a cookie

Orban writes.

inflation or stagnation. Does the MPC have to agree to something?

However, such a ruling goes against what NBP Governor Adam Glapinsky and perhaps most MPC members believe.

We tighten the screw, but to the maximum. We do not want to treat the patient until he dies. The MPC has to maneuver between Scylla and Charybdis – between anti-inflation measures and not pushing the economy into recession

Glapiński said during the September press conference. Apparently, the Monetary Policy Committee decided in October that a sea monster worse than inflation risked crushing the economy too much.

The MPC chose to stifle inflation with less force, but also at a lower cost. I’m trying to find some balance. It is not for us to judge whether this is a good or bad balance

– Economists Pecau evaluate the decision of the Monetary Policy Committee.

It appears that at this point, as a function of the central bank’s reaction, inflation expectations are not as important as concerns about economic growth.

– wrote Piotr Belsky, chief economist at Santander Bank. MBank analysts speak in the same vein.

The United Nations calls on central banks to stop raising interest rates. Writing about stagnation

In fact, this is the whole conundrum – fighting inflation with more price increases, deepening the economic slowdown at the same time, or accepting a longer period of inflation, but with economic conditions not so bad. It is clear that the MPC is choosing the latter. Will he be right? we will see. According to ING Bank Śląski’s aforementioned Rafał Benecki – no, because the lack of clear determination from NBP (and the government as well) to fight inflation will end up worse in the long run. But the MPC hopes to find a golden way.

Lack of heights will destroy the zloty?

One can also come across opinions that because the government has canceled the activities of the monetary policy board with generous fiscal programs (eg, in principle, universal credit holidays or energy supplements – without income thresholds for example), further monetary tightening does not Meaning him and simply give up the MPC.

According to former MPC member Bogoslaw Grabowski, the MPC should act in the opposite direction.

Monetary policy cannot pay attention to the fact that fiscal policy is bad – it increases demand, scattering money in a helicopter across the country, but it must achieve its goal anyway. This inflation target would have been pursued at lower interest rates than is now necessary – and much higher than it is now – had it not been for the way the government is behaving

– He said on Wednesday on TVN24 in the program “Kropka Nad I”.

The MPC’s failure to specify further rate hikes may weaken the zloty. But here, too, economists are divided over this effect. Certainly not having increases does not help polishing coin, but is it bad for her?

After the Monetary Policy Committee’s decision on Wednesday, the Swiss franc and the US dollar rose by about 0.08 PLN, and the euro by about 0.05 PLN. But, for example, according to Piotr Kuczyński, an analyst at Xelion, this also had an effect on the dollar’s appreciation against the euro.

Also, for example, Łukasz Zembik, Head of Analysis at Oanda TMS Brokers, recently said in an interview with Gazeta.pl that The bigger risk to the zloty in the long run is more geopolitical than not raising interest rates.

But, for example, Santander’s Piotr Bielski seems to caution against underestimating the relationship between the level of interest rates and the zloty exchange rate.

Attempting too early to slow the price increase may lead to an overvaluation of the zloty and extend the period of high inflation. At the moment, the scenario of the start of interest rate cuts in the second half of 2023, which has been proposed by the governor of the National National Bank for several months, seems very unlikely to us. Even if the MPC decides to pause in the following month(s), you may have to resume the cycle, if/when it turns out that inflation will not want to drop significantly and/or the currency will weaken significantly

– believes the chief economist of Santander Bank.

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