Polish former central banker central banker Boguslaw Grabowski comments on next month’s interest-rate decision in the context of weakening economic growth and high inflation.
Grabowski, who spoke in an interview in Warsaw on April 24, was a member of the Monetary Policy Council from 1998 to 2004 and now oversees the equivalent of $1.5 billion of assets as chief executive officer of Skarbiec Investment Management in Warsaw. He’s also a member of Prime Minister’s Donald Tusk Economic Council.
“It’s true inflation has been above the target for 18 months and the MPC can’t be comfortable with that. How long can they tolerate above-target inflation when Poland’s monetary policy is based on a direct inflation target? What needs to be stressed here is that we find ourselves in a situation where the factors driving inflation are out of the reach of monetary policy tools.
“If this situation persists, while domestic demand slows and external demand stays weak, then the Council should just say it’s prepared to wait longer for inflation to return to the target.”
On monetary policy:
“The MPC is doing the right thing by not raising interest rates. There’s no danger that this will allow expectations of high inflation to take root in the economy. This is no time to be ashamed of above-target inflation, since it’s helping the economy. Under current conditions, the problem isn’t to suppress inflation expectations and restore price equilibrium, but to steer the economy through a global crisis and sustain decent growth through EU funds.
“Once policy tools become more effective and the costs to economic growth decrease, policy makers should immediately send a signal and start acting to curb inflation.
“Right now you’d have to apply monetary tightening in very large doses to bring inflation back to the target, which would be very damaging to growth. The credit channel isn’t fuelling inflation because lending growth is at a very low level, while deposits are very high.”
“As for the exchange-rate channel, the zloty is being viewed in terms of risk and not interest-rate disparity. To correct that also requires very big rate increases, which would be dangerous for the economy.”
On MPC communication with markets:
“It looks like MPC members aren’t on the same page and they haven’t figured out how to tell the markets what they’re doing - which is to accept a longer period of higher inflation because they realize monetary tools aren’t effective at suppressing price growth but are very good at curbing economic growth. If I were in their shoes, I’d avoid spooking the market by signaling the possibility of rate increases.
“What I’d say is that we won’t tolerate a bigger overshoot of the target, but we will accept a longer period of above-target inflation if the rapid disinflation would inflict too much damage on economic growth. Given the external risks, global commodity prices, and weak domestic and foreign demand, we’ll just wait and see for a while.”
David McQuaid in Warsaw at email@example.com