In October, the price growth rate reached 6.8%, which is a dynamic that has not been seen since the first half of 2001. Although we had to deal with two interest rate increases, they still remain much lower than the market rate (WIBOR) and lower than inflation. As the scale of both increases came as a surprise to the market, we experienced the greatest sell-off in the bond market, especially long-term ones, and the zloty weakening in history. For now, however, the outlook for the economy remains positive.
In October, the Monetary Policy Council surprised the market by raising the reference interest rate by 40 basis points to 0.5%, and in November – deciding to make another hike by 75 basis points. up to 1.25 percent These are still much lower levels than the inflation readings, which means that real interest rates are negative, but at the same time more than expected by the market, which expected increases of 15 bp respectively. and 50 bps. This is probably not the end of the increases, as analysts expect inflation to rise to even 8%.
– Market quotes from interest rate contracts show that an increase of approx. 1.5 percentage points is expected in the next three months. This would mean that more or less in March the rate should be around 3%, and in the next 12 months – around 3.25-3.5%. And at this value the cycle would end. The problem with forecasting, however, is that there is basically no consistent communication from the MPC – says Aleksander Szymerski, fund manager, Generali Investments TFI. – The composition of the Council from next year is also a mystery – seven out of ten members will end their terms between January and March 2022. President Glapiński himself has a term of office until June, but in his case it is possible to hold the office for another six-year term. According to media information, the president intends to nominate him for the next six years.
Just before the rate hike, the president of the NBP and the chairman of the MPC, prof. Adam Glapiński assured that there would be no rate hikes as inflation is of a supply nature. This means that it does not depend on the decision of the Council because it results from global factors.
Supply factors are of course present, such as rising energy and fuel prices. In October, fuel for private means of transport was 33.9 percent more expensive. year on year, fuel – by 18.3 percent, and gas – by 16.1 percent. At the same time, however, due to the introduction of huge amounts of money into the economies and postponed purchases by the pandemic, increased consumer demand has arisen. As a result, food is also becoming more expensive (which is partly also a global phenomenon), but also core inflation is rising. NBP data indicate that in October it amounted to 4.5%, which is significantly above the target of the Monetary Policy Council (2.5% with deviations up and down by 1 percentage point). In turn, in 2022, CPI inflation is expected to be above 5%, of which in the first months of the year it will amount to approx. 7-8%.
– The society obviously sees rising prices and therefore there are more and more wage demands. In recent months, salaries have been increasing by approx. 8-9%. y / y and there is no indication that this dynamics will significantly slow down – reminds Aleksander Szymerski. – This is how the so-called price-wage spiral is winding: prices are rising, so employees are demanding increases, increases mean higher costs for enterprises, which forces further price increases, etc. This causes that the root causes of inflation gradually lose their importance, because this it starts winding up by itself.
Other European countries and the United States are also struggling with high inflation. As a result, central banks are raising their interest rates. In the Czech Republic, between March and October, the rate hikes reached 125 bp. The bank also decided to make the same hike in November (to 2.75%). The Hungarians, through a series of regular increases, reached the level of 2.1%.
The effect of high inflation in Poland and the non-transparent communication of the central bank with the market is the weakening of the zloty, especially against the dollar – since the beginning of the year, the Polish currency has lost almost 11 percent to the US and only slightly more than 3 percent to the euro. The strengthening of the American currency against the European one results from the fact that the tightening of monetary policy, i.e. limiting the purchase of bonds or, finally, interest rate increases, is expected earlier in the United States than in the euro area.
Another consequence is confusion in the bond market. Rapid and higher than expected interest rate hikes resulted in losses of bond funds in October, not only for fixed coupons and long-term ones, but also for short-term ones with floating interest rates.
– The funds had to sell securities on a relatively illiquid market, which of course deepened the declines. In October alone, over PLN 3 billion net flowed out of the funds [dane dla całego rynku – red.] – says the fund manager of Generali Investments TFI. – As a result, the bond price collapsed under the burden of supply. The longest floating coupon bonds have lost 2-2.5 percent since the beginning of October. It was a massive sell-off that has no fundamental justification other than a temporary lack of liquidity. Currently, therefore, they are very attractive securities, because not only are they sold at a large discount, but also their interest rates are systematically growing.
For now, the outlook for the Polish economy remains positive. In the third quarter, GDP growth amounted to 5.1%. y / y, clearly above analysts’ expectations. According to the forecast of the European Commission, next year it is to amount to 5.2 percent. This is mainly due to lively consumption and an increase in wages by approx. 10%. y / y