The Monetary Policy Council (RPP) moved one month ahead of expectations to hike official interest rates, saying price pressures from the labour market look increasingly dangerous and natural dampeners less helpful in taming inflation.
Markets expressed surprise and moved twice. An initial reaction adjusted prices to the question of timing. New hawkish tones in the policy statement then pushed markets to price in suspicions that the pending tightening will go further than previously thought.
The Wednesday puts the reference rate at 4.50%, the lombard rate at 6.0%, the rediscount rate at 4.75% and the deposit rate at 3.0%.
New hawkish tones – present more in the policy statement than in more elusive comments at the press briefing – include a “worsening” in unit labour costs, an admittance that natural price dampeners are “insufficient” and the addition of fiscal policy stimulus to the watch-list.
“The policy statement seems lightly hawkish,” BPH Bank chief economist Ryszard Petru – one of the few who had predicted a June move – told PAP on the sidelines of the briefing. “We still have a restrictive bias.”
“Without a doubt the main factor which the council points to remains the labour market,” Petru said of his take on the council’s evolving rhetoric.
The labour market has been the council’s top source of concern since a jump in wage growth rates in Q4 2006.
“The latest data of the situation on the labour market show a maintenance of the high rate of wage growth and a worsening of the relation between wage growth and labour productivity,” the council said, tightening its rhetoric on the matter.
“A further increase in wage pressures and, in consequence, of inflation pressures, is possible,” the council said.
Concerns that the labour market would force firms to raise prices have been traditionally been brushed aside by the council on faith that productivity gains would keep pace, that globalisation can curb corporate pricing power and that deep corporate pockets can cover the rising wage bill with ease.
No more. Those natural price dampeners could prove insufficient if inflation is going to be held near the central bank’s 2.5% target, the council now says. Where the council used to say inflation is ‘limited’ by such factors, they now say only that it ‘might be limited.”
“The council determined that the strength of these factors is insufficient to maintain inflation at the level of the target in the monetary policy horizon,” the council said in its statement as its most direct justification for the overall bias and the June rate move.
Fiscal policy made a re-appearance in council rhetoric after a long absence, and certainly not in order to praise the government for strong budget performance to date.
Council members put a warning shot over the government’s bow, adding fiscal policy stimulus to the watch list for monetary policy determinants.
The council did not further pinpoint its fiscal concern. Poland has just announced a cut in its social security premium, is talking terms on an extension of the standardised deduction for families and is facing budget sector wage demands and coalition partner spending demands.
“It is significant that the council pointed to fiscal policy,” BRE Bank chief economist Wieslaw Szczuka told PAP on the sidelines of the council briefing. “The council is turning to the government and is seeking help in fighting inflation. This is a form of warning.”
Elsewhere, prior tones were maintained. The economy is still seen growing at a rate above potential, both now and for coming quarters, even as the GDP growth rate eases from the Q1 peak. Inflation could ebb in Q3.
Markets had chosen to bet on July, not June, on assumption that the needed swing voter might wait for the plentitude of new data that will be on hand. The list includes the Q2 GDP report and a fresh inflation projection from central bank researchers.
Council member Jan Czekaj is largely believed to have been the key swing vote in question – the lone undecided voter in an otherwise polarized electorate. Czekaj’s individual rhetoric proved most fluid in the lead-up to the April move and was perhaps the most elusive of going into the June sitting.
Market pricing of the pending rate hike had been equally difficult to pin down, in sway with every last minute input.
The April hike – well flagged with several months of rising rhetoric – was offered as a pre-emptive move that need not signal the start of a tightening cycle.
But ensuing data – mid-June releases of a May CPI overshoot and continued strong wage growth – had pushed the priced-in next move from September to as far forward as July.
Council member rhetoric – most notably a set of hawkish comments for PAP from moderate Andrzej Slawinski – further contributed to the shift in expectations as hawks took to the stage.
Then, light dovish signals. The the April voting records had shown NBP chief Skrzypek – a tie breaking voter – aligned with the doves. Then, minutes from the May sitting appeared to show the council returning to its traditional hawk-dove division, giving up most of the areas of consensus had led to the April hike.
And that hawk-dove split was clearly tipped towards the doves, as a motion to add another 25 bps to official interest rates at the May sitting failed to garner a majority.
The council decision is the second in the current cycle after rate setters broke 14 months of stability with an April hike. The last time that the council offered a hike dates all the way back to the heady days following Poland’s 2004 EU entry.