Poland Unexpectedly Raises Rates for First Time Since 2012

(Bloomberg) -- Poland unexpectedly raised borrowing costs for the first time since 2012, caving in to government and investor pressure to tackle soaring inflation that’s already triggered interest-rate hikes across eastern Europe.

The central bank didn’t specify if Wednesday’s increase in the reference rate to 0.5% from a record-low 0.1% was a one-time move or the start of a tightening cycle. Governor Adam Glapinski -- who just a day ago suggested the benchmark could stay on hold even until 2023 -- will hold a news conference on Thursday.

The move came hours after Prime Minister Mateusz Morawiecki said that he expected an “appropriate” response from the central bank to the fastest price growth in two decades -- comments some saw as a sign that political acceptance for higher inflation was running out.

The zloty notched the biggest advance among emerging-market currencies on the news, which wasn’t predicted by any of the 29 economists surveyed by Bloomberg. Bonds extended a selloff and the WIGBank index of Warsaw-listed lenders hit its highest level since 2018.

The central bank’s statement failed to clarify the Monetary Policy Council’s outlook on rates. They dropped a paragraph about continuing quantitative easing but didn’t specify if the program had ended. They reaffirmed that currency interventions, which they used in late 2020 to weaken the zloty, remained part of their toolkit.

The declaration on interventions “can be read as an attempt to soften the hawkish tone of today’s decision,” said Piotr Bartkiewicz, an economist at Bank Pekao SA. “Thus, the gate is open for further rate hikes -- and thus a normal tightening cycle -- as well as to a stabilization of rates.”

Glapinski U-Turn

Three of Glapinski’s predecessors warned this week in an open letter that further delays to rate increases would jeopardize the economy and amount to a breach of the central bank’s price-stability mandate.

The MPC meeting’s outcome is surprising because only a day earlier Glapinski stuck to his contested stance that the surge in prices was temporary and caused by factors beyond central bank control, such as sky-rocketing energy costs.

During a speech on the eve of the MPC meeting, Glapinski called economists who demanded an immediate hike “amateurs or politicians,” and that bank analysts’ views were skewed because higher rates increase lenders’ profits.

“If external impulses turn into expectations and wages, and that would fix inflation at a higher level”, then “in two, three, four or five quarters, if we acknowledge that such a threat becomes real, a decisive withdrawal from accommodative policy would be needed,” the governor told the Congress 590 forum on Tuesday.

Communication Breakdown

Grzegorz Maliszewski, an economist at Bank Millennium SA, said the surprise followed “inadequate” central bank communications about the state of the economy and pandemic risks, while the MPC statement “wasn’t helpful” in assessing policy makers’ future steps. 

In its communique on Wednesday, the bank said that consumer-price growth -- the fastest in the European Union at 5.8% -- would remain elevated. The MPC targets medium-term inflation of 2.5% with a tolerance band of +/- 1 percentage point.

“The central bank couldn’t ignore such inflation any longer,” said Monika Kurtek, chief economist at Bank Pocztowy SA. “On the other hand, it’s a completely shocking decision in light of Glapinski’s comments up to now.”

The move aligns Poland more with countries nearby. Hungary and the Czech Republic have raised rates several times already in response to similar inflation surges and plan to hike further. Romania unexpectedly lifted rates on Tuesday for the first time since 2018.

For analysts at ING Bank Slaski SA, there are more rate hikes in the works, eventually bringing the benchmark to 2%, compared with 1.5% pre-pandemic.

“This isn’t the end,” they said in a tweet. “We see a large fiscal expansion in 2022 and high inflation.”

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