Polish borrowing costs may rise if the inflation rate takes longer to return to the central bank’s target than policy makers expected, said Jerzy Hausner, a member of the rate-setting Monetary Policy Council.
“We’re fairly comfortable that we can make the inflation target without increasing rates based on our most recent projection, but if we stop feeling comfortable about hitting the target, we’ll have to tighten,” Hausner said in a Dec. 13 interview in Warsaw, adding his preferred scenario would be to leave rates unchanged next year.
Consumer prices rose 4.8 percent in November from a year earlier, the fastest pace in six months, accelerating from 4.3 percent a month earlier. Inflation has been above the central bank’s 2.5 percent target for 15 months. Policy makers raised borrowing costs by a combined 1 percentage point in the first half of 2011.
The Narodowy Bank Polski last month revised its inflation outlook, published every fourth month, forecasting that its target will be met in the second quarter 2013 rather than in 2012. Policy makers have kept the benchmark seven-day rate at 4.5 percent since July to avoid undermining economic growth as the debt crisis of the euro area, Poland’s main trading partner, hurts export demand.
‘Can’t Just Ignore’
“The possibility of a rate increase is inherent in the policy guidelines we’ve set for ourselves,” said Hausner. “Price growth is above the target and its return to 2.5 percent keeps getting delayed with each new forecast we produce. This is something we can’t just ignore.”
The zloty has lost 12 percent against the euro in the second half of the year, the worst performance among more than 170 currencies tracked by Bloomberg. It strengthened 0.6 percent to 4.5301 as of 2:30 p.m. in Warsaw today.
The weaker zloty helps keep Polish products competitive abroad. Net exports added 1 percentage point to GDP growth in the third quarter as the Polish economy expanded by 4.2 percent.
The government cut its 2012 GDP forecast to 2.5 percent from the earlier projected 4 percent, while the International Monetary Fund reduced its estimate for next year to 2.5 percent from 3 percent estimated in October.
“I don’t expect the economy to slow next year to such an extent that we would be forced into monetary-policy easing,” Hausner said.
Disciplined Budget Policy
Central bank Governor Marek Belka said Nov. 23 that more disciplined budget policy would open the way for monetary easing. The regulator will comment on the 2012 budget next week.
The Cabinet approved the draft budget last week, with a general government deficit of 2.9 percent of gross domestic product. The plan envisages more revenue from dividends of state-owned companies, asset sales and mining taxes to compensate for slower economic growth and will also increase the disability levy paid by employers.
“Chances for reducing the general government gap to 3 percent of GDP next year are very low,” Hausner said. “It’s good the government has adopted such a target but there’s no need for such harsh fiscal tightening. It would be success to narrow the gap by 1.5-2 percentage points.”
“If the deficit is trimmed by about 2 percentage points this year from the very dangerous 7.9 percent, it would be decent fiscal consolidation,” Hausner said. “The key is to take another step forward on this path.”
Investors on the derivative market bet on a quarter percentage-point rate cut by September as the gap between nine- month forward rate-agreements and three-month Warsaw Interbank Rate is at almost 30 basis points.
Economists including Magdalena Polan of Goldman Sachs Group Inc. and Peter Attard Montalto of Nomura Intl. Plc, expect borrowing costs to rise in 2012 if a weaker zloty boosts import prices further. The Monetary Policy Council reiterated Dec. 7 that it may adjust rates if the inflation outlook worsens.
“We can’t disregard the currency’s exchange rate as its heavy weakening makes running monetary policy difficult and could encourage us to a rate hike,” Hausner said. “While inflation is driven by external shocks and the zloty isn’t a reason behind it but rather a transmission channel, we need to keep it from making inflation permanent on the internal side and triggering a price-wage spiral.”
Import Price Effect
More than 80 percent of Poland’s inflation growth in the last two months came from the costs of imported goods or products with imported components, according to Tomasz Kaczor, chief economist at the state-owned Bank Gospodarstwa Krajowego, known as BGK.
The Narodowy Bank Polski has sold foreign currencies to prop up the zloty four times. Central banker Elzbieta Chojna- Duch said today that an interest-rate change wouldn’t affect the currency or curb inflation.
“Our interventions aren’t driven directly by concern over inflation” and “it isn’t about replacing one policy tool with another as they should complement one another,” Hausner said. “We don’t have the capability to nudge the zloty to a fundamental equilibrium rate. The central bank wants to signal to investors taking advantage of this gap and speculating that they need to be aware of the risk.”
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