Belka Plans to Stay Course on Polish Monetary Policy in Scandal

Poland’s embattled central bank Governor Marek Belka vowed to keep a scandal over secretly recorded tapes from knocking monetary policy off track.

Below are some of the comments he made in a Bloomberg News interview yesterday:

ON RESIGNATION:

“I’m not stepping down. I don’t see a reason, though I admit this has been a blow.”

ON HIS RELATIONSHIP WITH MONETARY POLICY COUNCIL:

“Monetary policy will be pursued as it was. I’ve received a strong supportive statement from the Monetary Policy Council.”

“I met with the MPC on the regular occasion, seven MPC members were present at that meeting, with sometimes different views. But these seven people produced a statement that reassured the markets. The Polish economy will not be affected in any way.”

ON INTEREST RATE OUTLOOK:

“I’m almost certain that our next communication won’t diverge from what we were saying and thinking before. Don’t count on our policy course being changed after what has happened.”

“The forward guidance ‘a la Polonaise’ is still being forged. As you’ve heard at our past two press conferences, up to a certain point the only option for the future was to increase interest rates. Now, we have to take into account the option to decrease them as well. Of course, we’re not planning to and a rate cut is still rather improbable.”

ON VIEW SCANDAL WILL MAKE CENTRAL BANK MORE HAWKISH:

“Don’t expect this. That would be putting perceptions of how independent and credible we are ahead of what we think is the proper course of monetary policy.”

“We’ll have to discuss and reassess the latest numbers. We’ll also have the new inflation and GDP projections, which I won’t discuss now. That will provide us with some guidance and we’ll do what we think is proper.”

ON INFLATION

“What we have now is not yet deflation, but we could have negative inflation index in a third quarter. Some minor disruption in the oil market could stimulate prices up a bit. Otherwise, prices are stagnating and in fact they will be falling.

‘‘The ultimate test of the MPC’s efficiency is a stable inflation. The record has been almost impressive, I’d say. This doesn’t refer to the current very low inflation, which is below the target, but to the low volatility of inflation. ”

ON REPUTATIONAL DAMAGE FROM TAPES:

“Of course my credibility was hurt. And one way to rebuild it is to stay the course of a credible monetary policy.”

“The narrative created by this publication came from a complete ignorance on the discussed topics. Very few people understand these topics in Poland.”

“But once you project a narrative, which is simplified and false, it gets replicated in an unthinking way. It’s very difficult to fight it.”

“One issue I’d like to stress - I didn’t suggest to cut interest rates to support the budget.”

ON TAPED CONVERSATION:

“The whole discussion on my part was a lecture to a responsible, well-wishing government official who wants to understand what happens in an extreme crisis. To an official, who is not a finance expert. The minister’s immediate interest was what happens to the government during such a crisis. My answer was the same as usual: In truly extreme situations, a country cannot go bankrupt in its own currency.”

“This highly hypothetical and theoretical situation would require a very dramatic and unpopular adjustment of economic policies -- basically, a change that would smash any government pursuing a plan.”

“So it was just a lecture about extreme situations. I didn’t analyze things in the context of helping any party get re-elected. To the contrary, I told him that if things really go sour, you’ll have to do things that can’t be done by a political finance minister. It can only be completed by a brave ‘kamikaze’ minister, someone who’s completely detached from the ruling party, because what has to be done would be devastating to re-election chances.”

ON ECONOMIC STIMULUS AND CENTRAL BANK MANDATE:

“We’re not talking about propping up the budget. That’s not Extremistan, to use Nassim Nicholas Taleb’s phrase. The problem, the extreme situation, is the danger of a financial-sector collapse. And protecting the financial sector stability is a part of our mandate.”

“The central bank’s main mandate is to keep prices broadly stable, and we define it as consumer price growth of 2.5 percent, plus or minus one percentage point. Unfortunately, we’re below the target, as a matter of fact.”

“If prices were to grow fast, it would be against the law for us to ignore it and try to cut interest rates to speed up growth.”

ON NEED FOR NEW INSTRUMENTS

“By law, we’re responsible for inflation and co-responsible with the Polish FSA for financial stability. This means we need instruments to impact financial stability.

‘‘So why not give the National Bank of Poland the right to buy government securities in the secondary market, not only in the framework of open-market operations to protect financial sector stability.’’

‘‘This is the essence. This is in line with the constitution, which says different authorities should work together. This is in line with Article 3 of the central bank law. This is in line with common sense. The central bank cannot be set above all other authorities just to impose so called ‘discipline.’ No one gave us this right.’’

ON COOPERATION BETWEEN CENTRAL BANK BOARD AND MPC

‘‘This is a real issue. We in the board think that there’s always a problem with delineating instruments of monetary policy from instruments of financial stability. For example: should the refinancing rate when the central bank operates as a lender of last resort be significantly higher than the NBP benchmark rate? Now it’s so high that any bank in trouble would do everything to avoid resorting to this, even at the risk of failure”

“We’ve been discussing these issues ever since we started thinking about an amendment to the central bank law almost four years ago. We consulted constitutional lawyers and concluded this isn’t something that can be precisely delineated. The only way to operate efficiently is to find some kind of a modus vivendi with the MPC, to keep each other informed and show goodwill. It’s a platitude, but this is exactly what is needed.”

“Poles don’t realize what it takes to contain a banking crisis because Poland has never gone through this kind of crisis. There’s very little understanding that the instruments to prevent banking crisis aren’t the same as the instruments to keep inflation low.”

ON A POSSIBLE SECOND TERM:

“This is a question I can only laugh at.”

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