Governor Marek Belka said he would rather not risk the Polish central bank’s reputation by raising interest rates too soon, even if that means the “lesser mistake” of being too late.
Belka spoke in a March 26 interview at the Narodowy Bank Polski in Warsaw.
On the timing of rate increases:
“I’m not going to answer this question directly. The interest-rate setting process is a collective one, and being the chairman of the Monetary Policy Council, I’m particularly reluctant to speak publicly about interest rates. Some other members of the MPC are more explicit.
“The stronger the zloty, the less probable interest-rate hikes are. So the strengthening of the Polish currency from around 4.50 to the euro to 4.13 today gives us a little more leeway, a little more time to wait. However, the fact that the zloty is quite volatile doesn’t help us. Volatility in itself adds to inflationary pressure.
“So don’t ask me whether we’re going to increase rates at the next meeting. But clearly the mood is more inclined to tightening monetary policy rather than loosening it.”
On the approach to rate moves:
“My approach is as follows: in times of instability and all kinds of turbulence, you have to try to minimize mistakes. And if you increase interest rates and then the economy weakens dramatically, then you would probably be in a position where you’d be forced to reverse the rate increase.
“Even the European Central Bank committed this kind of mistake twice, in 2008 and again quite recently. With the reputation that the ECB has, they can afford it. But I would rather not risk our reputation. You can be too late, of course. But being too late is probably less risky than being too hectic, in the current climate.
“If the economy were to grow more and more strongly, particularly if the technical recession in Germany ends, then not increasing interest rates, if inflation remains stubbornly over 4 percent, would probably be a mistake. But being too late is probably a lesser mistake than increasing interest rates and then having to reverse the move. This is the kind of calculation that I have in mind when I look at the interest rates.”
On the impact of higher rates on growth:
“You’re right that a small rate increase has a limited impact on companies. But I wouldn’t underestimate the impact of such a move on consumer credit - on consumer finance and on mortgage credit. So it would have some impact on the economy. And don’t underestimate the effect on expectations and possibly on the exchange rate.
“Here I would say the most important thing is not to surprise the market. Investors should be given time to hedge themselves, to prepare for possible change. So looking at what the market expects makes sense from this point of view.”
On calls by colleagues for higher rates:
“Some members of the Monetary Policy Council have already announced that this is what they want. Some members think that the interest-rate level is simply too low, that no matter what, interest rates should be higher. This is an echo of pre-crisis estimates of the ‘natural’ interest rate, if a ‘natural’ rate exists.
“Poland has a monetary policy that is perhaps loose by our historical standards, but quite restrictive if you compare it with the euro zone, with the Czech Republic or even Denmark or Sweden, not to mention the U.K. The interest-rate differential is quite high between Poland and the rest of the European economies, and we probably shouldn’t go too much further.”
On chances of rate cuts:
“We see a slowdown coming, but if there is a slowdown and inflation, even if it is almost entirely due to external factors, then this is a situation in which you shouldn’t expect an interest-rate reduction.
“You’ll have to let me be a little convoluted here. Many analysts on the market, both inside and outside Poland, expect us to cut rates. But they’re probably much less optimistic about the Polish economy generally. They still see Polish growth slowing to 2 percent this year, which may happen. But my gut feeling is that it won’t slow down to 2 percent, and that 3 percent growth is more likely. This isn’t something that we’re satisfied with, but it certainly takes some of the inflationary heat off the economy.”
“We’re very serious about bringing inflation back to the target as soon as possible. We’re quite patient, by Polish standards, but inflation cannot stay at over 4 percent forever.
“Of course we’re concerned about inflation- if anyone is worried, it’s the people in this building. But you know what we look at is the internal structure of the inflation indexes. Most of the inflationary pressure is coming from abroad: from oil, from fluctuations in the zloty exchange rate. So long as we don’t see any of the infamous second-round effects, we won’t panic.
“We’re concerned and we’re impatient, as the headline inflation rate seems to have stabilized stubbornly at close to 4 percent, which is obviously beyond the MPC’s tolerance limit. But it doesn’t look like inflation is getting out of hand.
On economic growth:
“Two weeks ago we produced our four-monthly inflation and GDP forecasts, and it turned out that we were quite optimistic. I remember when everyone was putting growth in Poland this year at 2 or 2.5 percent and that was considered fairly optimistic. Basically, we’ve confirmed our own forecasts, and at the same time, the think tanks and investment banks are upgrading theirs. And now we’re where the consensus is.
“Our own, and particularly foreign analysts, underestimated the dynamics of the Polish economy. It hinges on cost competitiveness, that’s what it comes down to in the short run.
“Everybody is enthusiastic about Germany’s success in containing unit labor costs, in containing wages, and so on. We have gained in terms of cost competitiveness against Germany and against everybody else. And this being the case, our companies are probably quite capable of withstanding slow growth in western Europe. Of course, we’d be better off if there were a recovery, but if there’s a slowdown that doesn’t lead to an implosion of trade as there was in 2008 and 2009, our companies will still do quite decently.
“The slowdown in Germany doesn’t really hurt our economy too much. First, exports to Germany account for 10 percent of our GDP; in the case of the Czech Republic, it’s about 25 percent. Also, the structure of Polish exports to Germany is slightly different to countries like Hungary or Slovakia. Most of the exports from those countries are within the global distribution channels, the Suzukis, the Volkswagens, and so on. So if something goes wrong in the global economy or in China, those exports suffer.
“This is also quite important for us. But almost half of Polish exports are exports from our domestic companies. They produce final goods, consumer goods, mostly, but also construction materials and things like that. They’re not high- tech, but that means they’re probably less sensitive to fluctuations. So we know a little bit more about the Polish economy and we know about its resistance to crises, and about our cost competitiveness. And that’s basically what’s driving our economy forward.”
On the policy mix:
“Policy makers in Poland generally have it quite easy compared with many of our colleagues in other countries. From this point of view, Poland is on a different planet. We haven’t been through a crisis. This also has a downside because people aren’t willing to make any sacrifices or accept tougher measures, because -- why should they?
“How come Italian Prime Minister Mario Monti can suddenly raise the retirement age and it takes such an agonizing effort from the Polish government, when you’d expect the opposite? Poles have lived through dramatic changes in the last 20 years and they’re accustomed to it. Still, most of the government’s reform program, which was announced in the fall of last year, is on track, so I don’t think we’re in any danger.
“For monetary policy, most important will be the pace of fiscal consolidation. And it’s going quite well. Basically all the measures that have the potential to increase revenue have been enacted. Raising the retirement age to 67 is very important for the image of the government and maybe the personal position of the prime minister, because he’s raised the stakes so high.
“But from the point of view of near-term fiscal consolidation, its effect is almost zero, or at least not much more than as a signal for the markets. Everything necessary for fiscal consolidation this year is in place, so now it all depends on the pace of economic activity. The budget is assuming 2.5 percent growth, so there’s no reason to be afraid that the fiscal targets won’t be attained.”
On the ECB’s longer-term refinancing operations:
“The immediate impact of LTRO was positive. Sentiment toward emerging markets changed for the better; the zloty strengthened; the bond market strengthened, too. So from a macroeconomic perspective we shouldn’t be worried. Now, some Polish banks have complained that the measures violate the rules of equal competition, which is true. But the problem is that without this, we would probably see some deleveraging on the part of foreign banks, and when you look at the credit aggregates over the last two or three years, we don’t see any deleveraging in Poland at all. That’s contrary to what happened in countries such as Hungary or Romania or the Baltic States.
“You need time to do anything. Whether you use the time properly is another issue. As I understand, in Spain, it’s not so much a case of fiscal profligacy or an unwillingness to pursue reforms or do things that are unpleasant. But we do see some signs of the economy spiraling down. The clearest case is Greece, where the program seems to be failing not because the Greeks aren’t doing the right things. If the economy is contracting at a rate of 5 or 7 percent a year, you can forget about any fiscal targets. To a certain extent we have seen the same in Spain. So maybe the fiscal targets should be pushed back, if necessary.
“Fortunately, this is not an immediate concern for the National Bank of Poland or for Poland itself. But in its entirety, it’s a big headache for us. We’re concerned about every bit of bad information coming from western Europe, that’s for sure.”
On the euro:
“Joining the euro zone isn’t an issue at the moment. Nobody wants us there. We aren’t rushing into the euro. We don’t meet all the Maastricht criteria. We aren’t in ERM2, which we have to be for two years ahead of adopting the euro. Also, the euro area is undergoing repairs, so we have to wait and see what comes out of that. It’s not an issue for the next several years.”
Is Poland hurt by higher borrowing costs than the euro area’s:
“The main danger of embracing the euro prematurely is that an economy like Poland’s, which is in the process of catching up, would probably react to interest rates that are too low given structure of the economy. It would be prone to accumulating all kinds of bubbles. This is something we appreciate much better than we did in the run-up to the crisis.
“One qualification: before the crisis, there was this famous halo of being in the euro, meaning that Greek bonds paid 50 basis points over Bunds. Now it’s different. Now, even in the euro area, Polish bonds would be priced differently from Bunds. The spreads would narrow, but it wouldn’t be to zero or to a few basis points. So the market is now more sophisticated in differentiating between countries in the currency union. This makes the benefits less obvious, but it also mitigates the dangers.”
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