Poland’s economy remains on the path of buoyant recovery and high-frequency data point to its resilience to another wave of the pandemic. However, recent increases in energy prices will feed into broader categories of goods and services prices in the coming quarters. Inflation-curbing fiscal measures, including a temporary VAT rate and excise duty cuts on electricity, gas, heating, and fuels, will trim inflation growth in the first half of 2022, but extend the inevitability of elevated inflation in time. As a result, the MPC will be forced to raise rates further in the course of 2022. Since core inflation will remain persistently high, analysts assume rate hikes to continue in the second half of 2022 and in 2023. Is it too little too late?

The Polish monetary authority still lags behind other Central and Eastern European central banks as regards the scale of monetary tightening during the current cycle. The National Bank of Poland has lifted rates by 215bp so far vs a 350bp increase by the Czech Central Bank and a 325bp jump in the weekly deposit rate in Hungary. Given the inflation forecast (annual average CPI growth of 7.7% in 2022 and above 5% in 2023), ING projects that by the end of 2022 the main NBP policy rate will increase to 4%. In the bank’s opinion, in 2023 the cycle will end with the NBP reference rate at 4.50%. And the PLN to end this year around 4.45/€.

The Governor of the National Bank of Poland, Adam Glapiński, says he favors at least one more rate hike of 50 basis points. At a news conference, he indicated that reducing the size of rate rises could indicate that the tightening cycle could soon be over, which wouldn’t necessarily be so. Increasing it might indicate that inflationary pressures continue to rise. Therefore, he would prefer not to change the scale of current rate hikes. He considers 3% as a safe rate level, perhaps even 4% if economic prospects improve. Still, it seems that after the series of rate hikes, support for further tightening is fading and the NBP is starting to move away from other CEE central banks again. It’s worth noting that Glapiński also underlined that the central bank should not aggressively fight inflation at the cost of a significant rise in unemployment. The MPC chairman expects CPI to peak in the middle of 2022, as the anti-inflationary shield expires (according to the current government plan). CPI should subside later on but remain above the NBP’s upper target band (3.5% YoY) until the end of 2023 (according to the most optimistic projections).

Glapiński considers the elevated CPI as a result of external supply shocks. He says that strong economic prospects may add to price pressures but internal sources of inflation are still absent in Poland. ING sees different sources of elevated inflation than the MPC chairman. External shocks were amplified by a pro-inflationary GDP structure in Poland, based on a consumption boom. High CPI also reflects demand pressures and a wage-price spiral, the impact of which will only grow this year. A different take on inflation sources is a reason why elevated CPI is seen to be more persistent.

The beginning of the year will be a focal period to verify the chairman’s opinions as to the impact of higher energy prices materializes. Poland’s CPI inflation increased to 8.6% YoY in December 2021, the highest level seen last year. In annual terms, food price growth also accelerated to 8.6% YoY, while electricity, gas, and other fuels were 14.3% more expensive. Annual average CPI growth of 7.7% is seen in 2022, peaking at around 8.5% YoY in 1Q22 and 8.7% YoY in mid-2022. Inflation is expected to remain elevated even after the price of energy commodities starts to subside. Companies are still in the process of passing rising costs onto consumers. This is encouraged by strong internal demand, driven by a tight labor market.

1. First, companies will pass on higher energy and other input prices to final consumers; buoyant demand growth and higher wages will mitigate that.
2. Second, the growth in food prices is projected to be robust due to the soaring cost of fertilizer, among other things.
3. Thirdly, a tight labour market and upward pressure on wages increase the risk of a wage-price spiral.

The Prime Minister, Mateusz Morawiecki, announced that the government will bring in its “Anti-inflation Shield 2.0” that will include a VAT cut on gasoline and diesel to 8% for 6 months, starting in February. Authorities expect it to reduce pump prices by some 60-70 grosz per liter. We should also learn more about if and when 0% VAT on food will be implemented. These government actions to limit inflation via indirect taxes delay the unavoidable consequences of the rise in energy prices. They will undoubtedly flatten the CPI path this year while extending its elevated level over time. Moreover, returning taxes to their original levels will be a tough political decision as it would result in a rapid jump in the price of fuel and energy.

Glapiński also informed us that the 2021 NBP financial result should be significantly higher (above PLN10bn) than PLN9.3bn reached in 2020. This likely reflects a higher valuation of FX reserves given PLN depreciation, notably against the dollar. The chairman again underlines that the NBP does not target any PLN rate and intervenes in case of excessive volatility. Glapiński also notes that the central bank currently has no plans how to manage its bond portfolio acquired during the course of its QE program.

At the end of January, two out of three Senate members should leave, ie, Eugeniusz Gatnar (hawk) and Jerzy Kropiwnicki (swing voter). They will be replaced with new candidates, ie, Ludwik Kotecki and Przemyslaw Litwiniuk, who will be appointed on 12 January. Analysts believe the new MPC members should show a similar bias to those who are leaving their posts. The third candidate from the Senate, Joanna Tyrowicz, should replace the outgoing Rafal Sura by November 2022 at the latest. She should hold a more hawkish bias too.