NBP Study Finds That 1pp Rate Rise Lowers CPI Inflation By Max. 0.3pp After Six Quarters

Local financial news outlets circulate the results of a new study by NBP staff on the transmission of monetary policy, which suggests that a 1pp increase in short-term interest rates in Poland (3-Month WIBOR) lowers CPI inflation by no more than 0.3pp after six quarters.

• The study shows that a 1pp increase in 3-Month WIBOR leads to a quick 0.8-1.2pp appreciation of PLN's NEER. It weighs on economic activity with a lag, lowering annual GDP growth by around 0.3pp after 2-4 quarters from the interest-rate hike.
• The study notes that "exchange rate appreciation and weakening demand work towards lowering price pressures, leading to a decrease in annual inflation by a maximum of 0.3pp (after six quarters from the change in the interest rate). Core inflation decreases in a similar manner (by 0.2-0.3pp after 6-8 quarters)."
• According to the NBP, the decrease in headline and core inflation is driven unevenly by different channels of monetary policy transmission. The authors suggest that the exchange rate channel is responsible by half of the reaction in headline CPI but only ~25% of the reaction in core CPI.