Central Bank’s Top Dove Capitulates as Poland Loosens Budget

  • End of deflation near, arguments for cuts fade, Zyzynski says
  • Rate setter says spending paves way for gradual rate increases

The most outspoken supporter of monetary easing among Polish central bankers is resigning to a wait-and-see approach as the government opens the budget spigot.

“Fiscal policy is currently expansive, which naturally, over time, will pave the way for gradual monetary tightening,” Jerzy Zyzynski, who joined the rate-setting panel in April, said in an interview in Warsaw on Wednesday. “For now, however, setting any time frame for that is definitely premature.”

Borrowing costs have remained on hold since March 2015 even as deflation extends into a second year and Poland’s neighbors renewed their push for monetary easing. While Zyzynski has sided with fellow central bankers who joined the Monetary Policy Council this year in keeping rates steady, he was the only one to call for a small cut after a transition period ends with the appointment of the new governor.

Adam Glapinski won parliamentary approval this month to replace Marek Belka at the helm.

The Polish currency is the fifth-worst performer against the euro among its peers in emerging markets over the past three months, with a drop of 2.4 percent. The zloty traded little changed at 4.3686 versus the euro 4:30 p.m. in Warsaw. The yield on the government’s 10-year bond fell five basis points to 3 percent.

Policy Spillovers

Poland’s seven-month-old cabinet is forcing the central bank to adjust. The government already implemented a program of child benefits, raised the minimum wage and introduced Europe’s highest bank levy. It also plans to increase the tax-free allowance and lower the retirement age.

The end of deflation, which started in July 2014, is “undoubtedly” approaching, and that means that arguments in favor of rate cuts “are ceasing,” Zyzynski said. Factors on the demand side are playing an an increasingly bigger role as consumption strengthens, spurred by the government’s program of family benefits, while an improving labor market is set to translate into wage pressure, according to Zyzynski.

The unemployment rate declined to 9.1 percent in May, the lowest since August 2008. Gross wages have increased more than 3 percent on an annual basis each month since June 2015, jumping to the fastest in almost a year in April.

Wage Pressure

Minutes from the rate-setting council’s last meeting showed that some policy makers underlined a marked acceleration in wage growth in April which they said could signal “some” pressure on salaries emerging in the economy. A pick-up in consumption and an increase in its contribution to economic growth may lead to faster gains in consumer prices than expected by the central bank, according to the minutes published on Thursday.

Deflation moderated last month to a better-than-forecast 0.9 percent from a year earlier. The record run of price declines hasn’t slowed the economy, which has grown at an annual clip of more than 3 percent every quarter since the start of 2014. Gross domestic product gained 3 percent in the first three months of this year as European Union funds shriveled.

“The investment slowdown in the first quarter had nothing to do with the cost of money, so lowering rates wouldn’t then be effective,” Zyzynski said. “The real effect of the government’s actions requires time, allowing us to maintain a ‘wait-and-see’ stance in monetary policy.”

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