Lowering inflation. “Interest rate increases are not enough, actions needed through the exchange rate channel”

“Purpose as it is lowering inflationcan be achieved in many ways. Nevertheless, it can be done the fastest and most effectively, not only by increasing interest rates, but also by strengthening the zloty. That is why the communication of the MPC, cutting off from the weakness of the zloty and at the same time clearly supporting a stronger exchange rate, could help achieve the inflation target, “the report reads.

“Moreover, in our opinion, the power of communication could be strengthened if the words were followed deeds in the form of selling currencies on the market – by the Ministry of Finance and (on a smaller scale) by the NBP. Such steps may seem far-reaching, but are not controversial from an economic point of view. In the past, the NBP and the Ministry of Finance have been more active on the currency market, and the current outlook very high inflation (much above the main target of the MPC) seems to justify a return to similar activities “- added.

Citi economists emphasize that the official statements and statements of the MPC representatives show that the current policy of the Council was more or less raise interest rates, but at the same time not strengthen the zloty. In their opinion, however, such a strategy means that lowering inflation will be more difficult, longer-lasting and may require much larger rate hikes than would otherwise be necessary.

“A one percentage point hike may subtract half a percentage point from inflation, but on the condition that the zloty appreciates in reaction to the rate hikes. According to these NBP research, in the first quarters, immediately after the rate hike, the vast majority (at least 3/4) of the inflation lowering effect comes from the stronger currency, and not from the rate hike itself and its impact on other spheres of the economy “- it was written.


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“By raising interest rates, but at the same time trying not to strengthen the zloty, the MPC has less chance of success. In order to achieve the same anti-inflationary effect in a relatively short time without the support of the exchange rate channel, the MPC would have to raise interest rates not by 1.25 points, but by by an additional 4 percentage points to over 5%. We emphasize that these are rough estimates, but they reflect the problem facing the Polish economy. Such a strategy could end very painfully for companies and households that are particularly indebted, and ultimately also for the stability of the sector Therefore, getting rid of the exchange rate mechanism seems unjustified “- added.

According to the authors of the report, in the case of nominal interest rates in Poland the minimum plan for the coming months is to raise them to slightly above 2.5%, which would allow for slightly positive real interest rates.

In the opinion of economists, it is also necessary to take actions aimed at strengthening the domestic currency – the MPC’s departure from signaling fears of zloty appreciation towards signaling preferences for a strong currency.


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“However, it can be assumed that a significant change in the way of communication on the part of the MPC would increase the chance for a strengthening of the zloty. In recent weeks, many investors with whom we talked were convinced that despite the interest rate hikes, the MPC wanted to avoid the strengthening of the zloty. The memory of the intervention from December 2020 additionally limited the appetite for buying the Polish currency before the end of the year. To change this, a 180-degree turn in the MPC communication would be necessary – a departure from signaling fears of zloty appreciation towards signaling preferences for a strong currency “- the report reads.

The inflation problem is so serious that the shift in communication would be perceived as fully justified, and at the same time it would leave no doubts that the MPC’s goal is to lower inflation. On the other hand, any softening of this statement could create the impression that low and stable inflation is not the only goal, “he added.


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According to Citi economists, Mr.The reference of a stronger currency by the MPC could be strengthened and credible if the declarations were followed by deeds.

“For example, the NBP could declare its readiness to sell the currencies it bought in December last year as part of the intervention. This would allow the NBP to siphon off some of the excess liquidity from the market, and at the same time signal a return to the situation from before December 2020. intervention and could be spread over several weeks, as, for example, the Czech central bank is planning a systematic (spread over time) sale of income from reserves. In this case, the direction of activities and their signaling effect would be more important than the scale of currency sales “- it was written.

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“Secondly, the Ministry of Finance could return to its old practice of currency conversion on the market. Over the years, funds from the EU were exchanged for zlotys directly on the market, which supported the zloty in the period of excessive depreciation. After 2016, the scale of these operations has decreased and now practically does not matter. If the Ministry of Finance decided to return to this practice, it could be placed on the market every year several billion euros. The chances of such a solution have slightly increased in the light of the recent statements of Prime Minister Morawiecki, who signaled his readiness to act towards strengthening the PLN. In our opinion, a positive effect of such steps would also be a reduction in the pace at which excess liquidity is growing due to the exchange of currencies at the central bank, “he added.

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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