Poland raises interest rates more than expected in response to soaring inflation

After not raising interest rates for nine years, the National Bank of Poland (NBP) has done so for the second month in a row, bringing its key rate up by three quarters of a percentage point to 1.25%.

That hike – which was widely anticipated but larger than expected – follows criticism that the central bank has let inflation slip out of control.

Today’s monthly meeting of the NBP’s Monetary Policy Council (RPP) came in the wake of figures showing annual inflation rising in October to 6.8% year-on-year, the fourth month of consecutive growth and the highest figures in two decades.

Today’s decision raised the benchmark rate to a 16-month high of 1.25%. The rise is the largest jump since August 2000 (when it increased from 17.5% to 19%) and was larger than the 50bp consensus expected by economists.

Despite the move, inflation is expected to continue accelerating. Deputy finance minister Piotr Patkowski said this week that he saw it reaching 7-8% by the end of the year.

The NBP has also released its own projections today, raising inflation forecasts (at 50% likelihood) for 2021 to 4.8-4.9%. (compared to the 3.8-4.4% predicted in July). It also updated projections for 2022 from 2.5-4.1% to 5.1-6.5% and for 2023 from 2.4-4.3% to 2.7-4.6%.

Poland’s inflation rate has consistently been among the highest in the EU over the last two years. Yet, despite inflation far surpassing the NBP’s target of 2.5%, the central bank has been reluctant to intervene.

It has previously dismissed accelerating prices as transitory. It also argued that all-time low borrowing costs were needed to bolster economic recovery from the pandemic.

However, amid mounting pressure, and after neighbouring Hungary and the Czech Republic also raised their rates, in October Poland’s central bank finally raised interest rates for the first time in nine years, from 0.1% to 0.5%.

The previously passive approach to inflation has contributed to criticism of  NBP head Adam Glapiński, who was recently rated as Europe’s joint-worst central banker by New York-based Global Finance magazine.

Glapiński has also faced criticism for unexpected decisions and poor communication. The uncertainty surrounding the NBP’s responses has torn through bond markets, where yields on two-year notes rose 1.25 percentage points in October, the largest monthly jump in at least two decades.

On Friday, opposition leader Donald Tusk accused Glapiński – a close associate of ruling party chairman Jarosław Kaczyński – of incompetence and called for him to step down at the end of his six-year term in June 2022. “No inflation target of the NBP has been fulfilled,” he said.

Main image credit: Narodowy Bank Polski/Flickr (under CC BY-ND 2.0)

Maria Wilczek

Maria Wilczek is deputy editor of Notes from Poland. She is a regular writer for The Times, The Economist and Al Jazeera English, and has also featured in Foreign Policy, Politico Europe, The Spectator and Gazeta Wyborcza.