A further increase in the key interest rate is highly likely. This move could be similar to the level of the last session on August 5 (75 basis points) or even higher (100 basis points = 1 percentage point). Thus, the interest rate of the monetary policy will reach 6.25%.

Today, the INS published the price dynamics of industrial products. IPPI reached 53% in August year-on-year (compared to August 2021) overall (domestic market and foreign market).

Growth is significant with a more dynamic domestic market (71% price increase).

By major industrial groups, however, in the case of energy we have a price increase of 258.13%, and by CAEN sections and divisions, the price increase in the section “production and supply of electricity and heat, gas, hot water and air conditioning” is 301%.

Taking into account the fact that in the coming months the dynamics of demand/consumption of these products will affect (increase) both directly and indirectly the dynamics of consumer prices (CPI) and indirectly on the purchasing power (decrease), in the most likely case the interest rate of monetary policy may be increased by another 75 basis points at the last meeting of the year (November 8).

The interest rate of the monetary policy at the end of the year may be at the level of about 7 percentage points

If the two scenarios play out, the monetary policy interest rate could be around 7 percentage points at the end of the year, reducing the negative real interest rate to around 8% if inflation remains unchanged (an unlikely expectation).

At this point, I see no argument for a more aggressive approach to consumer price dynamics through the interest rate channel, because:

i) – the cause of inflation is not primarily monetary in nature (on the contrary);

ii) – the interest rate has its limits (after which it can cause negative consequences for the economy, for example, due to an excessive increase in financing costs);

iii) – there are other monetary policy instruments (for example, corporate liquidity management) that can be used simultaneously to achieve the same goal.

In this context, there are several aspects that deserve a lot of attention:

A completely reversed attitude of investors towards the markets. All asset classes were bought during the pandemic, and now we are seeing a general sell-off.

The US economy saw the largest outflow of any asset class since 2007-2009 between the inflation announcement and the Fed’s decision.

The only asset that is rising is the dollar (and in my opinion it plays a significant role in sterilizing the surplus of dollars and implicitly shifting the associated costs to most foreign markets).

Hindsight can make it easy to believe that, in theory, a reduction in market liquidity could be achieved relatively quickly with a new pandemic. Basically, I don’t think so.

A generalized attitude to the markets effectively returns liquidity to Caesar’s position.

In Eastern Europe, Hungary’s key interest rate reaches a double-digit level (13%) and announces the end of the tightening cycle of monetary policy.

Romania is currently at 5.5% and monetary policy is expected to remain/intensify restrictive.

Poland (6.75%) and the Czech Republic (7%) were slightly ahead of Romania, but gave signals similar to those of Hungary.

Therefore, from the point of view of the interest rate of monetary policy, we would have no reason to worry about “Caesar’s visit”.

From the point of view of the yield of government securities, things are different. The frame is the same, the paintings are different.

Hungary takes out loans with maturities of 3 months to 5 years with yields ranging from 12.5% ​​(3 months) to 10.5% (5 years) and offers reduced yields to 10% over 10 years. The yield curve is inverted, which usually portends the inevitable beginning of an economic downturn, or rather the entry into a recession.

Romania offers yields from 7.5% to 8.1% for maturities between 6 months and 2 years. From 3 to 10 years, Romania offers a yield of approximately 8.5% with little fluctuation. Let’s say a relatively normal yield curve, which assumes the existence of stable economic conditions that justify the prevalence of a relatively normal business cycle.

The level of liquidity can have the arrogance of a Caesar, and with a shortage – the temperament of a coward

At the same time, both the Fed and the ECB maintain or even increase their accommodative stance to emphasize the restrictive nature of monetary policy.

Coming back, should we try to answer Toshovsky’s question, namely, what is the “sufficient” level of the price of money? In other words, what interest rate is “high enough” to contain inflation and, at the same time, “low enough” not to cause excessive and unhealthy currency appreciation?

Well, I think it’s not necessarily a futile exercise if we’re discussing a level of liquidity that, when in excess, can have the arrogance of a Caesar, and when in deficit, the temperament of a coward.

N. Red: Mr. Libokor’s opinion is personal, without involvement of institutions with which he may be connected.