The National Bank of Poland, or NBP, unexpectedly raised its benchmark reference rate by 40bps to 0.5% on Thursday (Oct. 6) surprising markets who expected no change in borrowing costs until at least the first quarter of 2022. The Polish zloty currency jumped over 1% to a three-week high against the euro on the news.
It was the first increase in the main rate since 2012 as the central European nation faces an accelerating inflation rate that is currently the highest in the European Union. Early estimates showed the annual inflation rate rose to 5.8% last month, the highest since June 2001 and well above the central bank's target range of 2.5% plus or minus one percentage point. Meanwhile economists have predicted that it is likely to accelerate even further in the coming months.
Less than a day ago, Poland’s central bank governor, Adam Glapinski suggested the benchmark's increase was imminent, but he did not say it was inevitable.
Polish Prime Minister Mateusz Morawiecki earlier on Wednesday said he expected “an appropriate response” from the central bank to the fastest price growth in the country in 20 years.
(Source: National Bank of Poland)
"It is very surprising that the Monetary Policy Council did not wait until November, despite insisting that there was no risk that inflation was temporary, so they had either contradicted their rhetoric of previous months or changed their views entirely," Piotr Bielski, head of research at Santander Bank Polska told Reuters.
"The key question is whether this signals further gradual increases or whether there will be a pause after this hike, not a small one after all," he said. "I would assume, however, that it is the latter, we raise rates substantially, and then we will see how the situation is."
Poland joined its central European peers in tightening monetary policy. Hungary and the Czech Republic have raised rates several times already in response to similar inflation surges and plan to hike further. The Romanian central bank also hiked rates on Tuesday for the first time since 2018 aiming to bring back and maintain the annual inflation rate, which is projected to climb 5.6% by year-end.
“There had been concern that the NBP had its head in the sand for too long, but these comments suggest that they are taking the fight against inflation more seriously,” Capital Economics said in a note.
Focus Economics analysts see Poland's economy growing 5.1% in 2021 and 5.1% in 2022, which is up 0.1 percentage points from last month’s estimate.