Polish Central Bank Missed Rates Opportunity, Filar Says

Polish former central banker central banker Dariusz Filar comments on interest rates after core inflation slowed more than expected in March.

Filar, who spoke in an interview in Warsaw on April 24, was a member of the Monetary Policy Council from 2004-2010. He is a member of Prime Minister’s Donald Tusk Economic Council.

On the Monetary Policy Council decision to keep rate at 4.5%:

“The central bank’s March projections didn’t point to a radical fall in CPI over the next six or seven quarters, while inflation expectations remained high. The circumstances were perfect for a rate increase that would bolster the Monetary Policy Council’s inflation-fighting credentials and curb inflation expectations. Instead of that, they chose verbal intervention - ‘we’ll seriously consider a rate increase’ - probably because there was no clear majority for tightening.

“The MPC missed a perfect opportunity for a rate increase that would have given them scope to cut rates in the future, if that kind of stimulus is needed, while at the same time curbing inflation expectations. That opportunity is gone, because the fall in CPI and inflationary expectations has become more evident and tightening under these circumstances would flummox a wide spectrum of market participants. On top of that, core inflation is slowing more than expected.”

On rates outlook:

“There’s no room for rate cuts with the economy growing at close to 2.5 percent and until inflation slows to the upper end of the tolerance range, say 2.5 percent to 3.5 percent, for at least a quarter. I don’t see this happening before the third or even the fourth quarter. At the same time, zero or even slightly negative real wage growth and slowing output aren’t exerting any pressure to raise rates.

“In this situation, there’s only one way for the MPC to preserve its credibility after its comments in April. They have to say that they’re waiting for more core inflation data and the July inflation projection before making a final decision. If core inflation remains stable or slows (which is probable, since I see it at 2.4 percent or even 2.3 percent in April and at about 2 percent in May), and the projection turns out to be reassuring, then the rate-increase warning can be withdrawn.”

On policy orientation:

“A monetary ‘hawk’ is somebody who puts sustained, low inflation ahead of short-term efforts to stimulate economic growth. However, you can operate this way only when the financial system is stable and functioning normally, a situation that happily still applies to Poland.

“If the financial system is “melting down,” which is what we’ve seen in the U.S. and Europe, then the distinction between ‘hawks’ and ‘doves’ becomes meaningless, because the top priority is avoiding a collapse. Whether this comes at the price of sustained high rates of global inflation is something we’ll find out in a few years, because the impact of money supply on inflation comes with a substantial and unpredictable time lag. The return to conventional monetary policy distinctions will be possible in the U.S. and western Europe only after financial markets recover from the results of the crisis that erupted in 2007 and had its roots in the 1990s.”

To contact the reporters on this story: Dorota Bartyzel in Warsaw dbartyzel@bloomberg.net; David McQuaid in Warsaw at dmcquaid1@bloomberg.net

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

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