MNI INTERVIEW: Too Soon To Declare Inflation Victory - NBP's Tyrowicz

Repeated downside surprises suggest Polish price pressures may be lower in the second half of the year than previously projected, but it is too early to have confidence in core inflation trends and the National Bank of Poland must remain alert to upside risks, NBP Monetary Policy Council member Joanna Tyrowicz told MNI. 

Tyrowicz, who alone among Council members has advocated raising the base rate by 200 basis points at every meeting this year, said it was “way too early” to make decisive statements about the future development of CPI inflation and its path to the target. The NBP is expected to hold its base rate at 5.75% for the remainder of the year, with CPI at 2.5% and core at 3.8% in May. (See MNI EM INTERVIEW: NBP Likely To Hold Rates In 2024 - Dabrowski)

“I keep my terminal rate consistently at the same level of 7.75%. We knew already in 2022 and then throughout 2023 that 6.75% was not sufficient to bring inflation back to target sustainably. We are seeing that all stakeholders expect inflation in Poland to exceed the target also in 2026. This delay in bringing inflation back to target sustainably may have adverse effects on inflation expectations and thus the real economy,” she said in an interview.

Still, she pointed to “unprecedented” appreciation of the zloty as key to core inflation’s coming in consistently lower than short-term NBP staff forecasts over the past eight months, adding that further strengthening of the currency would be unwarranted.

“We are also seeing that the recovery of consumption is not fully commensurate with the wage growth or the overall income growth. Depending on how long that tendency continues, the pressure on prices may be more moderate than previously anticipated” Tyrowicz said.

CORE TRENDS

Public statements by NBP governor Adam Glapinski and some MPC members have revealed “fluctuating sensitivity to core inflation and growth of the economy,” she said, though she added that the Bank’s price stability mandate is “strict and time invariant,” and that substantially more progress in service prices and convergence of core goods prices is needed before it is possible to have “any confidence” in core CPI trends.

Labour markets remain historically tight, contributing to income growth and private consumption substantially above the NBPs projection for the first quarter of 2024, she noted. 

“One should expect the inflation to outpace the projection under such circumstances, but the opposite happened. We have yet to see more data to fully understand the current processes in the Polish economy.”

The reintroduction of VAT on food and reduced risks of energy price volatility have resolved two major sources of household uncertainty during the first half of the year, Tyrowicz said. For some households that may mean that precautionary savings are no longer needed, she added.

“The next months are going to be critical to gauge the strength of consumption recovery. One factor putting a lid on consumption growth may be related to settling the delinquent bills and other loans taken up during the difficult times of 2022 and 2023.”

MONETARY TRANSMISSION

Robust consumption, accelerating GDP growth and the removal of government energy support and price caps could also create additional space for firms to pass on increased costs, Tyrowicz said.

“If firms were delaying rather than foregoing further price hikes, we may see some negative surprises in inflation in the second half of 2024.”

Another MPC member Ludwik Kotecki has suggested that the central bank could consider the use of monetary policy tools other than interest rates, and Tyrowicz noted that the ECB’s Isabel Schnabel and Philip Lane had both pointed to weakness in the monetary transmission channel in recent speeches.

Poland “may be in an even weaker position,” she said, since Polish firms typically do not rely on credit but on their savings to finance investment.

“This limits the effects of the interest rates through the supply side of the economy and leaves us with the demand side channels.”