Looming Risks Sway Polish Central Banker Away From Rate Cuts

  • Hardt says he's `dogmatic believer' in monetary independence
  • 37-year-old economist sworn in by president on Tuesday

The more faces change at the Polish central bank, the more certain its policy board of staying the course for now.

Incoming policy maker Lukasz Hardt, 37, is the latest voice to call for interest rates to remain steady in the face of uncertainties buffeting the global economy as the Polish government prepares to deploy a spending program that’s likely to quicken the end of deflation. Hardt, a Warsaw University professor who specializes in economic history, said he was a “dogmatic believer” in central bank independence and its primary objective of ensuring price stability.

“Any monetary easing now would be entirely groundless,” Hardt, who was sworn in by the president on Tuesday and will attend his first policy meeting in March, said in an interview. “We should keep some space for maneuver in case it’s needed in the future, keeping in mind the space for cuts has shrunk a lot and is quite tiny.”

Dovish Bets

The central bank’s transition to a new rate-setting panel has fanned concern that the policy makers appointed by the president and his allies at the ruling party may tip the balance in favor of lower borrowing costs to stimulate the economy. While traders are still betting on some additional monetary easing over the next half year, most of the newcomers have so far spoken against cuts.

An economic slowdown in China and the U.K.’s potential exit from the European Union could trigger capital outflows from Poland and other emerging markets, risks that warrant caution on rates, he said. Meanwhile, the government’s $4.2 billion program of child benefits due to be implemented from April raises the likelihood that deflation will end this year, according to Hardt.

“It’s key for all central bank watchers whether the new council and each of its policy makers will be independent in their decision-making,” he said. “Let me stress then that the central bank’s independence is not at risk.”

Not ‘Tempted’

While the previous 10-member council has kept the benchmark rate at 1.5 percent since March, its critics have argued that borrowing costs should be lowered further because consumer prices have been falling for 19 months, putting the 2.5 percent inflation target out of reach for two years. Forward-rate agreements, or derivatives forecasting the level of future interest rates, show bets for a quarter-point cut by the central bank within six months, according to data compiled by Bloomberg.

“The new policy makers appear to support continuing a cautious and conservative approach,” said Jakub Rybacki, an economist at ING Bank Slaski SA in Warsaw. “They don’t seem to be tempted by any need to additionally help economic growth with conventional or unconventional monetary tools.”

Policy makers have defended the rate pause by pointing to robust economic growth and argued that the drop in prices was a boon for consumer demand, a major contributor to Polish gross domestic product.

Look Ahead

Hardt, who will join six policy makers appointed earlier to the panel by parliament, said rate setters should be forward-looking in their decisions to prevent policy mistakes.

Eugeniusz Gatnar, another new policy maker, said earlier in February that record-low borrowing costs have served the country well and no change is warranted. Jerzy Kropiwnicki said he wouldn’t rush to to change policy as the MPC had no influence on deflation while Eryk Lon said easing wouldn’t have a “significant impact” on real economy.

“The MPC needs to think whether or not the decisions taken today limit its room for maneuver in two or three years,” Hardt said. “I am not trying to say that the MPC should somehow neglect the current inflation level and its relation to the target. I am only saying that looking only on it would be a mistake.”

Besides Hardt, the president also swore in Kamil Zubelewicz on Tuesday. The head of state will also choose the next governor when Marek Belka’s six-year term ends in June. Jerzy Osiatynski will remain as the council’s only remaining policy maker after the changeover.

The zloty weakened 0.3 percent to 4.3728 per euro at 4:29 p.m. in Warsaw, dropping for the first time in five days. The yield on Poland’s 5-year zloty bond was unchanged at 2.25 percent.

Calm Start

Hardt said the lending growth rate “significantly” exceeding the pace of economic expansion could be a potential trigger to raise borrowing costs. That’s not the case for now, according to the policy maker.

“In general, since the economic situation is good, the start of the term will be relatively calm for the council,” he said. “Yet, there are clouds on the horizon and should any of the risks materialize, the council would definitely have a lot to do.”

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