RPP holds back on rates, despite growing concerns about inflation
The Monetary Policy Council (RPP) took a wait-and-see approach last week and resisted strong market pressures to hike interest rates after surprisingly bad inflation data for September.
Analysts said that the RPP decided to wait for October inflation data to see if the upward pressure on inflation was a trend or just a one-time spike. If the council decides that it is a trend, it will likely hike nominal interest rates such as the discount and Lombard rates.
The discount rate is the rate the National Bank of Poland (NBP) pays banks for deposits, and the Lombard rate is the rate the central bank charges for loans to banks. Both rates are key to chilling inflation.
"If the RPP makes any move, it will be a move up," said Krzysztof Rybinski, chief economist with ING Barings. "Our expectations are that the RPP will raise the rate during its meeting on Nov. 17."
The information that September inflation rose to 8% year-on-year, after 7.2% in August shocked many economists and proved that the upward inflation trend seen already in August was not a one-time phenomenon.
"To put in bluntly, September's inflation report was horrible," reads the weekly report of Citibank (Poland). "At the core of the debate is to which extent inflation is actually on an upward swing."
According to Citibank, the surge in inflation is coming from three factors: food prices, oil prices and higher prices for services. In terms of food, the rise is the result of higher tariffs for imports as well as the government's decision to support the prices of domestically produced food. Those hikes in food prices had a one-time impact on inflation, economists said. What is also worrisome, Citibank said, is that prices for services are steadily rising. Those prices were up 11% in September, compared with a 10.4% increase in August.
"Clearly, the inflation target for this year is threatened," Rybinski said.
According to ING Barings' forecasts, year-on-year inflation at the end of the year should be 8.2-8.3%. The NBP's inflation target for this year is 6.6-7.8%.
If the trend continues, ING Barings forecasts the NBP will hike the 28-day intervention rate by one full percentage point and the Lombard rate by one to three percentage points, Rybinski added. In September, the RPP raised the intervention rate from 13% to 14%, and left the Lombard rate at 17% and the discount rate at 15.5%.
Another potential cause of inflation is heavy spending by the government on social reforms. "We can also see the loosening of fiscal policy due to the higher-than-expected cost of reforms," Rybinski said. "It's necessary, but it's related to the lack of transparency in public finance."
Bohdan Wyznikiewicz, senior researcher with the Institute for Market Economics, pointed out that accelerating industrial output could also weigh into the inflation equation. In September, industrial output rose by 8.9%, compared with 7.1% growth in August and 1.4% in July.
"Until very recently, the situation was rather poor," Wyznikiewicz said. "Manufacturers settled on lower profits in order to keep market share."
As productivity increased, so did demand and prices soon followed suit, he added. In light of that, the 1.4% month-on-month inflation for September is not too dangerous, he said.
"We expect that in October inflation growth will slow," Wyznikiewicz said. He said that he expected month-on-month inflation of about 0.4% to 0.7% for the rest of the year.
An uptick in exports may have caused industrial output to rise, Wyznikiewicz said, although export data has not been released yet. Export data for September will be released Nov. 2, but Citibank is already saying it expects to see a 5-7% increase.
"Germany is recovering with much stronger manufacturing orders," said Citibank's report. "Also, September 1998 was a weak month for exports due to the Russian crisis."
