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Belka Says Poland's Positive Rates Mark Return to Normal

Poland’s rate increase last week marked a “return to normal” because it restores positive real interest rates and buttresses confidence in price stability, central bank Governor Marek Belka said today.

The following are excerpts from Belka’s interview published today on the website operated by the Narodowy Bank Polski in Warsaw.

On inflation:

“The Council doesn’t react to monthly inflation figures; it looks at what happened in recent months and what is likely to happen in the next few months. Today, the inflation rate is bouncing around 4 percent, but the important thing is its stubborn persistence at this high level.

“The Council saw that the inflation rate was persistently high and signaled this in its statements. However, we needed to wait for a full set of data from the first quarter before making a decision. You must remember that the March inflation forecast was essentially based on data from the previous year. So the first-quarter figures were key to verifying our knowledge of inflation and the economic growth rate. We only had a complete set of data at the end of April. The data confirmed our view that there won’t be a drastic, significant economic slowdown. From what we hear at the Central Statistical Office, the economy expanded at a 3.5 percent rate in the first quarter, despite weaker global growth. Companies are also in good shape, while consumption has stayed at a good level.

“At the same time, we saw that the monthly figures weren’t showing a gradual fall in the inflation rate. Our first opportunity to react was the May meeting and that is why we made the decision to increase rates. However, we’d already sent a clear signal in our statements that the Council was more and more concerned about the persistently high inflation rate.”

On “spooking” markets with talk of a rate increase:

“A policy of direct inflation targeting has to be aimed at influencing expectations of future inflation. If we were to tolerate persistently high inflation, we’d be violating our own policy guidelines. We had to send an appropriate signal and gradually increase its intensity.

“Spooking markets is nothing more than preparing them. Only a few months ago they were expecting rate cuts, not an increase. That would have been a shock. The Council consciously decided to prepare markets for a possible rate hike, we didn’t want a surprise. Unfortunately, investors didn’t want to listen for quite some time. Now I hope they will pay close attention to our opinions and not just rely on their own judgment.”

On the impact of higher rates on economic growth:

“It’s no secret that rate increases don’t foster economic growth. However, our view of the economy is more optimistic than that of most analysts. The economy is slowing, as everyone expected, but more gradually than had been feared. Next year growth should rebound, which can be seen in the government’s own budget forecasts for 2013. I wouldn’t be concerned about any negative effect on growth. We can expect to see the impact in four to six quarters and it will be to stabilize growth.

“In the first half of 2011, we definitely had a tightening of monetary policy. Raising interest rates by 100 basis points was tightening, but from an abnormally low level, by Polish standards, of 3.5 percent. I call last week’s decision a return to normal in monetary policy, not tightening. After the increase interest rates are still relatively low, but at least they’re now positive in real terms.

“The experience of emerging-market countries shows that keeping real interest rates negative for too long demolishes an inflation-targeting strategy. It erodes newly-acquired confidence in the central bank and uproots inflation expectations. People have confidence in the zloty because they believe that inflation won’t spin out of control. Of course they complain about low interest on bank accounts, but at least they’re not losing money. And in most developed countries, customers are losing money on their deposits. We can’t risk spoiling that. After the rate increase we returned to positive real interest rates. That’s why I call it a return to normal.”

On the future rate outlook:

“Will there be another rate increase? Let’s not judge that now. The Council signaled that it’s determined to fight inflation and I think it was a powerful signal. You can see from the scale of the reaction.”

On the impact of the EU crisis on Polish monetary policy:

“We’re taking account of European developments in our monetary policy, but it’s not a nervous reaction. Our monetary policy is accommodative and we’re not trying to curb inflation at all costs, because we know that the economic cost could be very high. Our interest rates are higher than in the euro area or the U.S., but thanks to that, we have monetary policy ready to use to protect the economy if there were a drastic worsening of Poland’s economic outlook. The developed countries have been stripped of this weapon since their interest rates are practically at zero. That’s why they had to resort to quantitative easing.”

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