Inflation fears drive Warsaw’s hawkish monetary stance | Business | Economic and financial news from a German point of view | DW
Raising interest rates to curb inflation or keep them low and risk higher inflation, but maintain fragile growth: this is the dilemma for central and eastern European bankers and politicians as the impact economic impact of the pandemic is fading. Richer countries further west face the same problem, but have largely avoided it so far.
Brazil and Russia have been hawkish, raising rates several times this year, while Turkey and Poland have been among the “doves” pushing for economic growth by keeping interest rates low. Adam Glapinski, director of the National Bank of Poland (NBP), recently said that raising borrowing costs would be “very risky” for the economy.
But last week, the NBP joined with central banks in the Czech Republic, Hungary and Romania in raising interest rates, for the first time in nine years, from 0.10% to 0.50%. The Czech and Hungarian central banks began their own tightening cycles in June, while Romania raised rates a day before Poland. The Czech National Bank raised its main interest rate by 75 basis points, its biggest hike since 1997, and said more rate hikes would follow.
Inflation is rising, prices are rising
Consumer prices have risen significantly in countries where the pandemic-related economic rebound occurred rapidly between Q3 2020 and Q2 2021, S&P Global Ratings chief economist Tatiana told Reuters. Lysenko. She singled out Poland, Hungary, Russia and Brazil.
Central Europe faces some of the highest inflation rates in the European Union. Polish inflation hit a 20-year high of 5.8% in September, which is above the central bank’s target range of 2.5% plus or minus 1 percentage point. The NBP inflation outlook, released in July, is 3.8% to 4.4% in 2021.
“What the bank underestimated was the increase in energy prices due to a 12.4% increase in natural gas prices for households,” Dutch bank ING said in a statement. to DW. European gas benchmark prices have increased by more than 300% this year. Energy and utilities make up a large share of the inflation baskets of Central and Eastern European countries, and their electricity supplies are more exposed to carbon-intensive sources such as coal.
The rise in inflation was also due to delays in global supply – and increasingly, rising domestic demand and tight labor markets, ING told DW. Global food prices are also near their highest levels in a decade, according to a key United Nations index.
“The rise in world prices for energy and agricultural commodities observed in recent months could further exacerbate the pressure on prices in the coming quarters,” added ING.
The Office of Investment and Business Cycles (BIEC), a Polish economic think tank, believes there is no sign of easing inflationary pressures in the near term.
“Since the beginning of the year, in each monthly study, nearly 90% of the households questioned believe that in the coming months prices will increase, of which a third affirm that they will increase faster than to date”, a BIEC said in a press release. report.
The report adds that inflation expectations of industry executives are now at their highest level since 2004, and that 20% more companies are considering raising prices in the short term rather than cutting them.
Poles are now getting much less for their zloty banknotes due to rising inflation
The NBP will discuss the new inflation and GDP projections at a meeting in November, which will be vital for the course of Poland’s monetary policy.
The central bank has indicated that an abandonment of lax monetary policy could occur as soon as Poland’s post-pandemic economic recovery is sustainable. In March 2020, the NBP reduced the reserve requirement rate from 3.50% to 0.50%, and GDP fell by 2.7% in 2020. But it has resumed at more than 5% growth this year. .
Analysts say this may not be the end of rate hikes.
“The key question is whether this is an introduction to further steady increases, or after this decision there will be a pause,” said Piotr Bielski, director of the economic analysis department at Santander Bank. Polska, to the Reuters news agency.
“In our opinion, a high CPI [consumer price index] the readings in November and December will be decisive factors here. We expect that at the end of the year, CPI inflation in Poland could approach 6%, ”ING said in its statement.
Polish mBank analysts even believe the rate move was likely the start of a cycle. “We are more inclined to think that all of the monetary tightening will be done by the end of 2022,” they said. Analysts could imagine a scenario of a 50 basis point increase in November, as well as another 50 in March of next year.