Jerzy Hausner, a member of Poland’s Monetary Policy Council, comments on the outlook for the central bank’s policy.
The Narodowy Bank Polski last week left the benchmark seven-day rate unchanged for a 17th month at a record-low 3.5 percent.
Hausner spoke in a Nov. 23 interview in Warsaw.
On monetary policy:
“Today our job is to steer clear of a danger zone where we’d risk losing control of several processes that may strongly undermine stability. Whether it makes sense to increase interest rates in this context is an open question. We’re split on the issue and the outcome is that rates haven’t changed. Neither side has a monopoly on truth here.
“I think the main arguments for tightening monetary policy have been accepted. But some Council members believe the proper moment hasn’t arrived to begin the tightening cycle. The argument that it would be premature to increase rates now, because that might damage the recovery and in consequence destabilize the economy, has some merit.
“The economic crisis, in my view, requires an active monetary policy that anticipates developments. We bear a heavier responsibility now because turmoil makes it harder to take corrective action, while policy interventions suffer from longer time lags and are less effective. If we don’t react early enough and allow certain developments to gather momentum and upset our relatively fragile economic equilibrium, then getting things back under control will be much more costly and take much longer.
“I don’t think anyone can declare with certainty that we missed the right moment to increase rates. It’s evident the economy is doing well with borrowing costs at current levels. We haven’t made any mistakes that can be construed as damaging to the economy. That doesn’t mean we’ve been mistake-free. By definition, we act in a forward-looking manner under conditions of uncertainty.
“It’s an open question what we will decide in December and subsequent months. But we should care whether these decisions fit into a logical sequence and can be interpreted as reflecting a rational, specific policy course. Our decision to raise the mandatory reserve rate was a signal that tightening is on the way. Monetary policy must keep that sequence in view. That means the Monetary Policy Council, as a whole, decided there are necessary but not yet sufficient reasons for increasing interest rates.”
On inflation risks, zloty:
“The Monetary Policy Council is accountable above all for the strength of the currency. That doesn’t mean that our actions are solely prompted by inflation, but you can’t ignore its importance. What concerns me is that while the core inflation rate is low and stable, the actual inflation rate is much higher, for two reasons. First are food prices, which are naturally rising for seasonal reasons, but won’t be coming down soon because there’s a one-year production cycle in agriculture. Second is energy.
“If consumer-price growth sustains this relatively fast pace, ‘second-round effects’ could appear due to stronger wage growth. The recovery will stimulate job creation. We must also anticipate some shrinking of the work force when Germany and Austria open their labor markets in May 2011. This will make pressure for higher wages more effective.
“At the same time, capacity utilization in industry is already high and we appear to be on the verge of an investment boom. Corporate demand for credit has recently increased. All this means the demand for labor is growing.
“We aren’t experiencing a strong appreciation of the zloty, and the currency’s long-term tendency to strengthen is on the whole favorable, because it stabilizes inflation.
“But at the same time we have powerful disruptive forces in financial sector, both abroad and at home. If we conclude they pose a risk to our economic fundamentals, we will have to consider adjusting our monetary policy parameters and our message.”
On the Fed’s monetary easing and capital inflow:
“In the short term, U.S. monetary policies aren’t hurting situation in Poland and there aren’t any discernible short-term effects.
“The medium-term effect is that if money supply is increased, there will be more liquidity, and given the large interest-rate disparity and the faster economic growth in emerging markets, that liquidity will flow to those countries, including Poland.
“If they’re portfolio inflows, and we have to assume this will mainly be ‘hot’ money, then the zloty’s tendency to appreciate will strengthen. From the standpoint of inflation, that will be good news. But for other categories that help shape the inflation rate in the longer term, it won’t be at all good if the zloty appreciation trend is pronounced. The higher the government’s borrowing needs and sales of debt securities, the more the currency will gain. So the risk is large.
“If the world finds itself awash in cheap money, the question will be how to sterilize it without creating new tensions. To a degree, sooner or later -- and this is question nobody can answer today -- this is a situation that must ignite inflation. So in the long term we will have to deal with a change in the economic environment, which will become inflationary and will hamper conducting monetary policy.
“In a nutshell, our dilemma is how to handle excessive currency appreciation due to portfolio capital inflows caused mainly by sales of Treasury securities. My view is that monetary policy can’t effectively react in such situations, and that any attempt to do so via monetary instruments is doomed to failure.
“If you see the monetary policy authorities acting as a stabilizer, then the more other agents act to destabilize economic conditions, the more it is incumbent on us to play the stabilizing role. That doesn’t mean we can be substitutes or surrogates for the finance minister or bend him to our will. We don’t have the instruments to do so and it would be an error to conduct policy in defiance of the government.
“When you add domestic risks to the destabilizing factors from abroad - and here I have in mind cheap-money policies and the problems of the euro area - then you can see we’re conducting monetary policy under difficult and often unpredictable conditions.”