Inflation is scary, the zloty does not help. Borowski: We are dealing with a certain fluctuation in the monetary policy

The fourth wave, the third dose of the vaccine, the next variant – what next with the coronavirus and what will the vaccinations and restrictions look like? Interest rates – why are we talking so much about them now, can they still rise and what does it mean for our portfolios? New year, new, higher bills – what will we pay more for and by how much, will the anti-inflation shield help and to whom? Choose the topic of conversation with an expert in the Q&A program – we invite you to vote at this link.

Maria Mazurek, Inflation is scary, but on the other hand we have better than expected GDP information in the third quarter. How do you see the Polish economy now?

Jakub Borowski, chief economist, Credit Agricole: We have just raised the forecast of economic growth for this year to 5.2%. from 4.9% – after better than expected third quarter and good data for October. These data, as well as the data on the economic situation in November, indicate that the entire second half of the year may be slightly better than we previously expected. However, we cut the forecast for next year – from 4.7 percent. up to 4.3 percent GDP growth.

Adam Glapiński and Mateusz MorawieckiThere are new data on Poland’s GDP. And there are surprises. Important data in the context of rates

Through inflation?

This is the first factor that we believe will slow down consumption growth next year, despite the anti-inflationary package. In our opinion, inflation in 2022 will amount to an annual average of 6%, including 5%. This increase will be mainly due to faster rising food prices. Of course, our inflation forecast is based on some key assumptions that must be met, including with regard to the exchange rate. However, we assumed slower consumption growth in 2022 in the previous forecast. The main reason for the reduction of the economic growth forecast in 2022 is the reduction of the contribution of the increase in inventories. Their growth will boost GDP in 2021 much stronger than we expected. The shortage of materials, raw materials and semi-finished products prompted many companies to increase their inventories this year. Next year, this shortage will be less severe and the increase in inventories will be lower than in 2021.

Car factory, illustration photo.Instead of “just in time” there is “just in case”. Companies are stocking up like never before

The zloty exchange rate has been evoking a lot of emotions recently due to the weakness of the Polish currency, we even saw a breakthrough of 4.70 per euro. What may await us next year?

In our forecast we do not assume a significant strengthening of the zloty, we see a rather flat path of the exchange rate, in the case of the euro it will be around PLN 4.60. This is because we believe that the NBP will not want to significantly raise interest rates, these increases will be, but clearly smaller than expected by the market. In such a situation, the zloty will not appreciate, but rather the downward pressure on it, which may be boosted by interest rate hikes in the United States, is more likely. And the weak zloty raises inflation. On the other hand, an important element for the zloty exchange rate, and thus for inflation, is the discussion on the National Reconstruction Plan. The easing of the dispute between Poland and the EU will trigger an inflow of funds that will support demand and investments, especially public ones. Moreover, if Poland comes to an agreement with Brussels and leaves the escalation path, the risk premium for investors will decrease, as the likelihood of a polexit will decrease. And this should help the zloty.

In our opinion, these two factors will balance each other, which will result in the aforementioned flattening of the Polish currency against the euro. We are cautiously optimistic about the National Reconstruction Plan. We assume that this agreement will take place next year, but we will see a clear inflow of money from this source only in the second half of next year.

Of course, there are risk factors for this scenario, such as the development of a pandemic situation. We had some trouble with what scenario to adopt, but ultimately the optimistic option, indicated by the first reports from virologists, prevailed, i.e. that this variant, being more infectious, at the same time will be less dangerous in terms of COVID-19 passing. Its high contagiousness may paradoxically shorten the wave length of the fourth infection wave.

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So if the pandemic calms down and no unexpected big shock occurs, the zloty will behave relatively calmly, inflation on average will amount to 6% next year. People – consumers – however, pay attention to the monthly data, what may be the highest values, the peaks of inflation?

We are just passing the summit this quarter. At the beginning of next year, we expect 6.9 percent. year on year – here the strong anti-inflation shield effect will be visible. In the second quarter, when this effect will no longer exist and fuels will start to become more expensive, we forecast 7 percent. inflation, 6.1 percent in the third, and a more marked decline in the fourth, to 4 percent. – although we assumed this end of the next year even before the idea of ​​the shield appeared. Its impact will be short-term.

Inflation is high not only in Poland, which allows the rulers, including the authorities controlling the monetary policy of the NBP, to conduct a narrative that bases price increases on external factors beyond our control. What may it look like in the near future – according to your forecasts, inflation in Poland is to remain elevated, and what will it look like in other countries, will we see a breakdown with the situation in Western Europe?

In the euro zone, we expect inflation to rise next year, but of course it will still be clearly lower than in Poland, around 3%. Inflation in Poland will be more persistent than in the west, and this is because our economy is already entering the overheating phase, the inflationary pressure related to the lack of labor will increase, which will increase the wage pressure. The second reason is the insufficient reaction of the MPC to monetary policy, which I am expecting, and therefore our inflation will be more persistent than in the countries of the region, the Czech Republic and Hungary, where the monetary policy reaction is clearly stronger.

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So how do you assess the activities of the NBP?

In my opinion, the monetary policy of the NBP is inconsistent at the moment. It seems to me that President Adam Glapiński would like to have lower inflation on the one hand and he is trying to convey it to us, but not so much that he would accept a strong appreciation of the zloty caused by a significant increase in interest rates. And only a strong appreciation of the Polish currency is a tool that allows for a significant and quick impact on inflation. His recent comments also reverberate that he does not accept rising unemployment as an inherent cost of lowering inflation. Higher unemployment is the price we pay to lower wage pressures, increased inflation expectations and inflation. Therefore, we have a situation in which price stability is not treated by the NBP governor as an unambiguously priority.

I have a strong impression that there has been a reversal in the hierarchy of monetary policy goals, the main goal of which has become to support the government’s economic policy, and reducing inflation has been relegated to the background. This is easier to see when one examines the responses of other central banks in the region to increased inflation. In the case of the Czech Republic and Hungary, we are dealing with a clear subordination of the interest rate policy to the achievement of the inflation target. The international standard of central bank independence was created precisely so that in the conditions of an inflation shock, the central bank could focus on gradual and consistent reduction of inflationary pressure.

In this context, in the space of comments – not by economists – there are some associations with Turkey, perhaps greatly exaggerated.

The references to Turkey are, of course, completely unfounded, for a number of reasons. First of all, Poland is a member of the EU, secondly, the NBP is an independent bank, its president cannot be changed overnight, and monetary policy cannot be imposed on it. There is also a high awareness of the negative effects of increased inflation in Poland and the associated social pressure. There is no public acceptance for high inflation and exchange rate instability. When the zloty exchange rate broke the level of 4.70 per euro, we had verbal interventions, both on the part of the NBP president and the prime minister.

What we are dealing with, however, is a situation that I would describe as a certain fluctuation in monetary policy, it is this internal inconsistency that I have already mentioned. At the moment, monetary policy should be oriented towards lowering inflation to the level of 2.5%. in the first half of 2023. Unfortunately, this goal seems to have been redefined. It is evident in the statements of not only the NBP governor, but also some members of the Council, including hawkish, that is, supporters of higher rate hikes, that they will be satisfied with inflation below 3.5%. Let us recall – since 2004, the NBP’s inflation target is 2.5%. with an acceptable range of fluctuations of 1 percentage point in both directions, which should be interpreted as striving for these 2.5 percent. precisely, and not up to the upper limit of deviations from this target. This is exactly how this target is interpreted by central banks pursuing a direct inflation targeting strategy.

I think that after the December meeting of the Monetary Policy Council, investors will realize that it will not provide such interest rate increases as the market is currently pricing in. And it will be negative for the zloty.

This meeting is already on December 8. How much do you think rates will rise?

In my opinion, there will be a 50 basis point hike in December, the same will be seen in January. And at the end, the cycle of increases will end at 2.25%. However, the intensification of the pandemic in Europe and the related further deterioration of consumer sentiment in Poland, as well as the introduction of the anti-inflationary shield may mean that the MPC will stop at the December rate hike.

Next year, there will also be a gradual replacement of the MPC. What can this change in monetary policy?

In my opinion, not much. At the beginning of the year, only two Senate members will be replaced, for whom we can expect a relatively high inflation aversion. On the other hand, when it comes to members elected by the president and the Sejm, I think that they will not be people whose election will significantly affect the attitude of the majority of the Council. I assume that the new members will, in principle, share the CEO’s assessment of the economic situation and the need to tighten monetary policy – it will be Adam Glapiński for the second term of office, as at the moment everything indicates that.

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About Eric Wilson

The variety offered by video games never ceases to amaze him. He loves OutRun's drifting as well as the contemplative walks of Dear Esther. Immersing himself in other worlds is an incomparable feeling for him: he understood it by playing for the first time in Shenmue.

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