Members of the Council still seem to favor stabilizing interest rates, although in the face of the prolonged conflict in the Middle East and the closure of the Strait of Hormuz, the probability of rate hikes in the coming months has increased. For now, however, we maintain our current forecast of keeping rates at the current level until the end of the year.
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The statement released after the MPC decision hinted at heightened uncertainty related to the war in the Persian Gulf and the situation in the energy commodity market. As usual, the Council emphasized that further decisions depend on incoming information regarding inflation prospects and economic activity in Poland, and again stressed that key to shaping these prospects are changes in commodity prices and global inflation in the context of geopolitical conditions.
The Strait of Hormuz as a key factor for rate decisions
It seems that primarily oil prices and, to a lesser extent, natural gas prices in the coming weeks and months will determine what steps the Council members will take. If Middle Eastern commodity exports are restored and fuel prices fall, the level of interest rates will likely remain unchanged this year (this remains our baseline scenario).
However, if it turns out that there is no agreement between the United States and Iran, and the Strait of Hormuz remains closed indefinitely, tightening monetary policy by the MPC could become a realistic option.
President of the NBP Adam Glapiński pointed this out during his conference, stating that in recent weeks the risk of rate hikes has increased. While he noted that such a step is not yet determined, on behalf of the MPC he emphasized that if necessary, the Council will not hesitate to take swift and decisive action.
When asked about the conditions that would need to exist for MPC members to vote for rate hikes, he highlighted the crucial role of inflation projections. If the central bank judges that the risk of a persistent breach of the inflation target (defined as 2.5% +/-1pp) by the CPI index clearly increases, proposals to raise rates will likely appear on the table and, in our view, could find majority support in the Council.
In practice, everything boils down to the Strait of Hormuz. Recent days have brought some new hope for the conflict to end and maritime traffic to resume. If real actions follow these expectations, the topic of rate hikes could quickly disappear from the agenda. A prolonged deadlock in the Persian Gulf would, on the other hand, make tightening monetary policy very realistic – perhaps already in July, when the NBP presents a new inflation projection.
