The National Bank of Poland (NBP) increased its reference rate by 50bp to 6.5% on July 7, below market expectations for a hike of 75bp at least.

While the increase was nearly certain, the relatively small scale of it was at odds both with the domestic and international context, which offered grounds for a bigger hike.

Analysts hint at the NBP’s ignoring the much-weakened zloty, which lost nearly 5% in value to the US dollar this week alone on the back of growing recession fears in the Eurozone and the US.

But it seems it was the same recession wariness that prompted the NBP to wind down the pace of monetary tightening after a series of five increases ranging from 75bp to 100 bp.

The GDP forecasts, which the NBP published together with the rates decision, showed that the central bank expects the economy to grow just 0.2%-2.3% in 2023, a clear toning down of expectations compared to the previous outlook of 1.9%-4.1%.

The NBP’s forecast shows “a downgrade to GDP growth next year as there are growing signs now that Poland’s economy is slowing. This probably played a role in the NBP’s decision to slow tightening today,” Capital Economics said in a comment.

The central bank is getting “more susceptible to the worsening perspective of GDP growth: a technical recession in the second half of 2022 and a slower rebound in 2023-2024,” noted ING.

At the same time, the NBP also assumed stubbornly high inflation in 2022-2023 with price growth at 13.2% - 15.4% this year and 9.8% - 15.1% the next year.

Feeble growth and high inflation are putting the NBP in a bind, according to analysts.

The central bank’s inflation outlook is “more pessimistic than the median of market expectations and does not provide grounds for ending the rate hikes cycle in the coming months,” ING said. 

“The double-digit CPI in 2023 indicates a risk of persistent and self-perpetuating price rises that may be difficult to stop with deeply negative real interest rates. At the same time, sources of the economic slowdown are external, and less restrictive monetary policy will not affect them in a significant way,” ING also said.

The surprisingly mild scale of the increase has confused the outlook of the tightening’s further course. Analysts see the target interest rate at 7.5% - 8.5%, assuming that it will take the NBP more time than previously expected to get to the upper range of the predictions.

The NBP’s decision comes after neighbouring Hungary’s central bank NMB surprised the markets in late June with a robust 185bp hike to 7.75%, reaffirming the bank’s willingness to fight inflation and prop up the ailing forint. Hungary’s CPI growth came in at 10.7% y/y in May.

Hungary also raised the rate of its one-week deposit facility by 200bp to 9.75% on July 7 further affirming the forint.

Similarly, the last meeting of the old bank board of the Czech National Bank CNB before a new governor takes over this month ended with the outgoing Governor Jiri Rusnok and the other hawkish board members going for a large 1.25pp hike to 7%. Czech inflation reached 16% y/y in May, above the CNB’s forecast of 14.9%.