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Polish Rate Rise in May Would Be ‘Mistake,’ Glapinski Says

Polish Rate Increase in May Would Be Mistake
The White Eagle, the national emblem of Poland, hangs at the entrance to the central bank of Poland in Warsaw, Poland. Photographer: John Guillemin/Bloomberg

Poland’s central bank would make

“a serious mistake” if it raises interest rates in May because the move would needlessly stifle growth with inflation set to slow later this year, rate setter Adam Glapinski said.

“I’ll seek to convince other policy makers not to submit a rate-increase motion in May and if there is one, I’ll vote against it,” Glapinski said in a phone interview yesterday. “If we raise rates in May, we’ll simply be joining the panic about March inflation, and the Monetary Policy Council can’t allow itself to be swayed by panic, especially by a senseless one.”

Poland’s inflation rate rose to the highest in 2 1/2 years in March, raising economists’ expectations the central bank will increase its benchmark seven-day reference rate next month for a third time this year. The Warsaw-based Narodowy Bank Polski has already raised the rate to 4 percent from a record low of 3.5 percent in two steps, mostly recently on April 5.

One-month forward rate agreements fell 2 basis points to 4.50 percent after Glapinski’s comments, extending their drop for a third day. The contracts are factoring 21 basis points, or 0.21 percentage points, of rate increases in May, calculated as the premium over the three-month Warsaw Interbank Offered Rate. That’s down from 31 basis points on April 14.

‘Big Turnaround’

The zloty fell 0.7 percent to 3.9775 per euro at 3:31 p.m., making it the biggest decliner today among more than 20 emerging-market currencies tracked by Bloomberg.

Glapinski’s comments “can mean quite a big turnaround for the market, which has been swamped by various comments since the inflation release last week,” BNP Paribas SA emerging-market strategists led by Bartosz Pawlowski in London wrote in a note to customers. “Consequently, expect some scaling down of rate hikes expectations.”

Average corporate wages rose 4 percent on the year in March, the statistics office said today, down from February’s 4.1 percent pace. The central bank has “lots of time” to make a decision on rates, Elzbieta Chojna-Duch of the Monetary Policy Council said today on TVN CNBC, reinforcing Glapinski’s argument that it would be an error to rush into monetary tightening.

‘Action Scenario’

“We’re back to the usual set-up, a five-five split in the Council, which makes the preset scenario of gradual rate hikes the most likely,” Mateusz Szczurek, chief economist at ING Bank Slaski, said today by phone. “The next rate increase may come in June or July, with a fourth one around October, when the European Central Bank may move.”

Policy makers shouldn’t base decisions on monthly economic data and the March inflation report released last week can’t “dictate” a rate increase in May, especially because central-bank projections had foreseen higher prices, Glapinski said. Instead, the central bank should stick to this year’s “action scenario” of two to four quarter-point rate increases, he said.

Poland should strive to “maintain a stable parity” in the spread between its borrowing costs and those in the euro area, Glapinski said.

“We anticipated the ECB with the first rate increase, but there’s no reason to do it again,” he said.

Inflation will probably slow in the second half to less than 3.5 percent, the upper end of the central bank’s 1 percentage-point tolerance range around its 2.5 percent target, which argues against lifting borrowing costs as early as next month, he said.

‘Can’t Give In’

“This is the first time I’ve spoken so openly, but the Monetary Policy Council can’t give in to pressure from the market; nothing has happened to make us change the action scenario we adopted for this year,” Glapinski said. “That scenario called for from two to four rate increases, each by a quarter-point, through the end of the year, and I see no reason why we should change that.”

Rising inflation expectations, which in March posted the biggest one-month jump in a decade according to a central bank survey, are a “purely psychological” reaction of companies and consumers to higher prices, since the economy is growing too slowly to generate wage and price pressure, Glapinski said.

The continued absence of a rebound in private investment suggests economic growth may not reach 4 percent this year, he said, while workers won’t demand higher wages with the unemployment rate above 13 percent.

“I don’t see any second-round effects or even the possibility that they could appear,” Glapinski said. “What we have to keep in mind is that high interest rates could slow the economy without curbing inflation, which is something we can’t allow to happen.”

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