Poland will probably leave borrowing costs unchanged into 2012 and may consider raising them as a “shallow and short” economic slowdown is unlikely to curb prices, central banker Andrzej Bratkowski said.
Inflation slowing economic growth is the biggest concern and there’s no prospect for a “strong deceleration” in price growth, Bratkowski said in an interview in Warsaw yesterday. With the economy expanding at a 3 percent rate “there’s not much” downward pressure on costs, he said.
“In the short term, we should adopt a wait-and-see stance that may stretch into the beginning of next year,” Bratkowski said. “The probability that we will see a rebound in GDP growth after two or three quarters is greater than the likelihood that the slowdown will continue. That means we may have to consider a rate increase.”
The Narodowy Bank Polski left the benchmark seven-day reference rate unchanged this month at 4.5 percent after raising borrowing costs by 1 percentage point earlier this year as it weighs a slowing economy against near decade-high inflation. Investors on the derivative market expect the central bank to cut interest rates by July as nine-month forward rate agreements are trading 34 basis points below the three-month Warsaw Interbank Offered Rate.
No Rate-Cut Scope
“I don’t see any scope or need for interest-rate cuts,” Bratkowski said. “In our latest statement, we reiterated the possibility of monetary tightening as rate increases are still more likely than cuts” and “our aim was to restrain the wildly fluctuating expectations on the markets.”
Poland’s annual inflation rate reached 5 percent in May, the highest in almost 10 years, before easing to 3.9 percent in September. It has been hovering above the Monetary Policy Council’s 2.5 percent target for more than a year.
Other members of the rate-setting Monetary Policy Council including Anna Zielinska-Glebocka and Zyta Gilowska have said it’s too early to reduce borrowing costs as inflation isn’t slowing enough.
Still, Governor Marek Belka said the central bank shouldn’t “tighten too much” in response to inflation, while keeping its policies oriented toward maintaining stability in a global economic crisis.
“We need to combat inflation, but not overdo it,” Belka wrote in an article for Bloomberg Businessweek Polska, published yesterday.
Gross domestic product, which expanded 4.3 percent from a year earlier in the second quarter, may grow 3.8 percent in 2011, according to the International Monetary Fund, which slashed on Sept. 20 its forecast for Poland from 4 percent in a May report, downgrading also 2012 GDP outlook to 3 percent from earlier 3.8 percent.
“For the time being, inflation risks substantially outweigh the risk of slower economic growth,” Bratkowski said. “I don’t think we’ll be seeing consumer-price growth below 3.5 percent this year, although it could get close to that level in December even with a weak zloty.”
The currency’s third-quarter depreciation will be reflected in prices from October, Bratkowski said. The zloty slumped about 10 percent against the euro in the third quarter, making it the worst performer among emerging-market currencies tracked by Bloomberg.
“The only thing that could bring the inflation rate down faster is the zloty,” Bratkowski said. “So far it’s been making our job harder. The zloty has some room to start working in our favor. Nevertheless, inflation will slow only gradually.”
The zloty slumped to the lowest level in 27 months before the central bank intervened to strengthen the currency on Sept. 21 for the first time since the exchange rate was allowed to move freely in April 2000. It stepped into the market two more times in the three following weeks.
The central bank’s operations were effective, “calming market sentiment and making the zloty less volatile,” Bratkowski said. Still, it would be “dangerous” to boost the currency to curb inflation, he said, adding that such an outcome “wasn’t the point” of intervention.
“Monetary policy shouldn’t be guided by the exchange rate so long as we don’t see an escalation of external events and the zloty doesn’t become a destabilizing force,” Bratkowski said.
The zloty weakened to 4.3713 against the euro at 2:12 p.m. in Warsaw from 4.3573 yesterday.