Beware of Polish Rate Hike as Central Banker Warns on Budget

  • Polish rate setter urges change in monetary bias `pretty soon'
  • Zloty gains after Osiatynski calls it `notably undervalued'

Poland’s only rate setter who’ll remain after this year’s changeover says the next move in borrowing costs may be up, even as investors bet on the incoming monetary panel to loosen policy.

The Monetary Policy Council “should pretty soon change its bias,” considering the outlook for fiscal loosening and a period of one to two years needed for the central bank’s decisions to impact the economy, Jerzy Osiatynski, whose six-year term doesn’t end until December 2019, said in an interview in Warsaw on Thursday. From 2017, public finances seem “difficult to hold on a leash,” he said.

Jerzy Osiatynski
Jerzy Osiatynski
Source: Narodowy Bank Polski

“We’re in a wait-and-see mode, with the prospect for monetary policy tightening rather than loosening,” said Osiatynski, one of 10 panelists who sets Polish rates. “A period of interest-rate stabilization is rather being extended. It will be a time for close monitoring and vigilance over the signals coming from the sphere of fiscal policy.”

Risks are converging on the budget, with the nine-week-old government in Warsaw locked in a standoff with the European Union that threatens investment in Poland. Standard & Poor’s, which shocked investors last week by cutting the nation’s credit rating by one level, said revenue measures to offset higher spending won’t be sufficient and described the macroeconomic assumptions behind the 2016 budget as “too optimistic.”

‘Pure Evil’

By broaching the possibility of the first increase in interest rates since 2012, Osiatynski is the latest policy maker to put the central bank on a collision course with the ruling Law & Justice party. A week after Poland’s first-ever downgrade by S&P sent bonds and the zloty tumbling to a four-year low, central bank Governor Marek Belka called a proposed law on foreign-currency mortgages “pure evil.”

The recent depreciation of the Polish currency is “only temporary” as “serious and long-term investors know for sure that the zloty is notably undervalued,” he said. The zloty had its biggest gain in more than a month following Osiatynski’s comments. It traded 0.9 percent stronger at 4.4533 against the euro at 11:31 a.m. in Warsaw.

Osiatynski’s remarks “open a discussion about rate hikes if the zloty will deteriorate further” and show the MPC “will be very cautious with signaling any possible loosening,” said Miroslaw Budzicki, a fixed-income strategist at Poland’s largest lender PKO Bank Polski SA. “After such comments it seems that a 25-basis-point rate cut priced in the market now may be considered unjustified and may disappear.”

New Panelists

The possible need for monetary tightening has already been discussed among the outgoing policy makers, according to Osiatynski.

“I’m not sure if new members will be convinced enough to use such a tool in reaction to possibly over-expansive fiscal policy,” Osiatynski said.

Law & Justice’s spending pledges have stoked concern that its policies may worsen the fiscal deficit and hurt the country’s status as a regional haven. With eight members of the 10-person rate council leaving in the coming weeks, the leadership transition promises to reshape monetary policy in Poland after the ruling party said it was seeking candidates who’ll support easing and wants the central bank to help spur economic growth.

Easing Pause

The central bank last cut its benchmark to 1.5 percent percent in March and has since argued against resuming easing even as deflation deepened more than expected. Forward-rate agreements haven’t shown bets for tightening in the next 12 months since August. The contracts traded 26 basis points below the Warsaw Interbank Offered Rate on Friday, indicating scope for more than a quarter-point of easing.

Osiatynski joined the council in December 2013, replacing Zyta Gilowska, who quit for health reasons. He was nominated by then-President Bronislaw Komorowski, who was defeated in May by Law & Justice candidate Andrzej Duda. The president will name a successor for Belka, whose term expires in June.

While Poland’s 2016 budget promises to keep the deficit below 3 percent of economic output, as required by the European Commission, Law & Justice can’t be sure of finding reliable sources to finance its spending plans from 2017, Osiatynski said.

That means a change in the current “wait-and-see” monetary stance may be needed even as deflation, already lasting a year and a half, may drag on for two more quarters, according to Osiatynski.

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