• Central banker supports cutting price target centered at 2.5%
  • Discussion may gain traction after Belka's exit, analyst says

After more than three years of missed inflation targets, a Polish policy maker thinks it’s time to align the country’s aim closer with the European Central Bank.

The goal, set at around 2.5 percent 12 years ago, initially had the intent of bolstering exports by way of a weaker zloty, Kamil Zubelewicz, a member of the Monetary Policy Council since February, said in an interview with Rzeczpospolita newspaper published on Wednesday. Polish products are now competitive thanks to quality rather than price, he said.

“If such a discussion arises, I will opt for reducing the inflation target,” he said. Poland set its goal “slightly higher than the euro region, which was meant to marginally weaken the zloty against the euro and help maintain the competitiveness of Polish exporters.”

Inflation targets are proving elusive for central banks around the world as cheaper commodities and stagnating economic growth weigh on prices. Inflation in the euro area has been below the ECB’s target of just under 2 percent for the past three years.

Record Deflation

In Poland, the run of deflation that started in July 2014 is showing no signs of easing. The latest projection by the central bank’s staff sees price declines extending through the third quarter. It also showed that the index will only come near the 1.5 percent lower end of the central bank’s target range next year.

“Since the beginning of 2004, the continuous inflation target has been standing at 2.5 percent, with a permissible fluctuation band of plus/minus 1 percentage point,” the central bank website says about its main operational goal. “This means that every month, annual CPI should be as close as possible to 2.5 percent.”

Inflation has been below 2.5 percent since December 2012 and below 1.5 percent since February 2013. In 2004, when the price-growth target was laid down, CPI averaged 3.5 percent.

“The point isn’t to hit the target every month -- that’s impossible -- but in the long run it should oscillate around the target,” Zubelewicz said. “Inflation is a certain cost for the economy and in the long run it’s hard to conduct monetary policy assuming that costs will rise.”

Price Stability

All but two members of Poland’s 10-person policy board have been replaced this year, setting in motion debates about the bank’s mandate and raising questions on the future of its monetary policy. The central bank has kept borrowing costs unchanged at 1.5 percent since March 2015 as the economy gains at one of the fastest clips in the European Union despite the longest bout of deflation in 60 years.

The National Bank of Poland’s main mandate is to ensure price stability by targeting inflation. The policy council’s approach to its target has to be flexible, and missing it amid deflation “isn’t exceptional,” policy maker Eugeniusz Gatnar said after a rate decision this month.

Another new council member, Marek Chrzanowski, said in March that he saw no need for adjustments in the target.

While such a move may not gain traction early in the term of the revamped MPC, a more natural time to make a change would be when a new governor takes over from Marek Belka when his term ends in June and the panel adopts monetary-policy guidelines for next year this fall, according to Marcin Mrowiec, chief economist at Bank Pekao SA. A lower target is better fitted to address subdued inflation and economic growth after the global financial crisis, he said by phone.

“With a target at 2.5 percent, the only thing the MPC should be doing is cutting rates to bring inflation to target, ” Mrowiec said. “So it should adopt a target close to 2 percent.”

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