Poland Should Cut Rates More as GDP Bottoms Out, Bratkowski Says

Poland’s central bank should reduce its benchmark interest rate by as much as 1 percentage point from a record-low 3 percent as prospects for a quick recovery wither, policy maker Andrzej Bratkowski said late yesterday.

The following are selected comments from Bratkowski, a member of the Narodowy Bank Polski’s Monetary Policy Council, in an interview in Warsaw.

On the economy:

“The downturn is worse than we thought and the start of the recovery keeps getting moved back. I see some signs we’ve reached the bottom and it won’t get worse. Export growth has stabilized and isn’t slowing any more. Thanks to low inflation, consumption is also stabilizing. Now it’s a question of taking baby steps forward.

“The second quarter will be the weakest; after that, annualized growth should improve because the base effect of year-earlier growth will be in our favor.

“There’s no way we’re going to get a quick bounce given the scope of the European Union’s debt crisis.

“Domestic demand has been falling since the second quarter of last year, so de facto, we’re in a recession. The only reason we’re growing is net exports - in other words, declining imports have become our growth engine. Conventional monetary policy should take this into account.

“What we should be trying to do is prop up domestic demand. If it works, monetary easing will encourage more consumption and make companies less inclined to cut back investments and jobs.”

On the need for rate cuts:

“ With the sluggish economic activity we’ve had for the past few quarters and the bleak outlook for a rapid recovery, we should be thinking about 2 percent to 2.5 percent as the optimal level for interest rates.

“Another 50 basis-point rate cut is completely justified and I expect that will be my position at the June policy meeting, unless I encounter some new arguments that change my thinking. Let’s cut to 2.5 percent and then we’ll see. If there’s no data showing obvious improvement next month, then I don’t see any obstacles to making another move in July. We might want to slow the pace at that stage and cut by 25 basis points, pause for a month and then do another 25.

“It’s obvious the rates we have now are above any sensible level. That’s why we need to get them down quickly to 2.5 percent, which may not be exactly optimal in my view, but which is at the top end of what could be described as the optimal range. After that we can be more cautious about whether to do another two, smaller cuts. If nothing dramatic happens, then we can afford to take smaller steps.

“We need to get down to this 2 percent-2.5 percent range quickly because we’re clearly behind the curve. We should already have been there a while ago, so there’s no reason to wait and no time to lose.

“That’s my vision of a ‘correction’ in monetary policy.”

On inflation:

“For the time being, I don’t see any risk of a quick uptick in inflation.

“If there are no negative surprises on food and energy prices, and the EU economy remains weak in the second half, it’s possible we could get a month or two of below-zero inflation. That’s no tragedy, because it’s nonsense to think a country like Poland can get sucked into a deflationary spiral. That shouldn’t happen.”

On conventional monetary policy:

“I’m a proponent of conventional monetary policy because conventional monetary policy is supposed to be anti-cyclical. Maybe I have a different understanding of what ‘conventional’ means.

“Real interest rates don’t always have to be positive during a recession, especially when inflation is being fueled by supply shocks. Policy should be forward-looking and based on forecasts. Conventional monetary policy allows deviation from the target. It’s anti-cyclical.

“The situation in Poland isn’t so dire that we need to jettison conventional policy and adopt an anti-inflation orthodoxy that conflicts with direct inflation targeting. We also need to remember that the external environment has changed. The balance of risks is different from the early 2000s, when the global economy was expanding at 4 percent and all you needed to do was cut rates to trigger a rebound.”

On unconventional monetary instruments:

“It’s hard to say what the central bank can do when we have 100 billion zloty ($30.7 billion) of excess liquidity in the banking sector and real interest rates at 2 percent. I think we should use conventional methods to clean this up. If that doesn’t work, then we can consider other means, although I personally don’t see any instruments that could boost lending.”

David McQuaid in Warsaw at dmcquaid1@bloomberg.net

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