Chojna Says Polish Economy May Limit Scope for Rate Increases

The Polish central bank’s scope for further interest-rate increases may be limited by slowing economic growth over the next few quarters, said Elzbieta Chojna-Duch, a member of the Monetary Policy Council.

She spoke in a May 23 interview in Warsaw.

“Economic growth of 4 percent or faster may be difficult to achieve. Corporate borrowing data suggest that there’s a slim chance of the investment boom the government was counting on in its GDP forecast. The pace of hiring and the slow decline in the unemployment rate indicate that companies remain cautious about the outlook for their core markets.

“Companies need economic and political stability, and the crisis in the euro zone is preventing that. Economic growth will probably slow on an annual basis over the next few quarters, which should limit the scope of cumulative rate increases needed to stabilize inflation at the target level in the medium term.

“Higher interest rates certainly won’t encourage lending or help reduce unemployment. Our goal is to bring inflation back to the target, but we can’t ignore conditions in Poland and the global economy. I’m worried about domestic and European investment spending, which is going to determine the pace and sustainability of the recovery.”

“Excessive monetary-policy tightening won’t help change the trend” of weak investments “and we can see that other European central banks aren’t rushing to combat inflation with higher interest rates, even though they’re under severe pressure. Demand is recovering, but capacity utilization is still too low to allow for optimism about the economic outlook.

Limited by Context

“This context limits our ability to use interest rates because the forces at work are too powerful. Rate increases could prove ineffective and risk choking off business activity. Our dilemma is whether to continue the tightening cycle and if we do, when and at what level to end it so that we don’t damage economic growth.

“Inflation will definitely slow. While we know that price growth can be expected in the summer months, the annual inflation rate will probably top out at 4.7 percent in May or June and then start to decline until it returns to the target within our policy horizon.

“It’s possible the rate could fall to the vicinity of 3 percent by the end of this year due to the statistical base effect and as the external supply shocks of food and energy prices fade. I don’t see any new threats to price stability.

`Supply Factors'

“Inflation is being driven by supply factors, and that’s difficult to fight with interest rates. While it’s doubtful our decisions have any impact abroad, it’s obvious they influence the domestic demand created by loans and investment. For me, the keys will be what decisions are taken by the European Central Bank, the global situation and our new inflation and GDP projections.

“The purpose of our rate increases to date was to curb inflation expectations and head off second-round effects. I don’t see any breeding grounds for inflationary pressure in the economy, and the risk of second-round effects is small with the unemployment rate at current levels.

“The next inflation projection prepared by the central bank staff will be important in determining whether we should end the current tightening cycle and shift to a neutral monetary-policy stance.”

To contact the reporter on this story: Monika Rozlal in Warsaw mrozlal@bloomberg.net.

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net