Game Theorist at Polish Central Bank Sounds Alarm on Policy Rush

  • Zubelewicz sees rates held in 2016; hike is likelier next move
  • Uncertainty grows as result of government plans, banker says

The most surprising pick for Poland’s central bank says the government is tinkering with the economy so much that policy makers have no choice but to be on alert and prepare to raise interest rates.

A rush by the eight-month-old government to reshape policy brings with it “significant uncertainty” for the Polish economy, said Kamil Zubelewicz, one of nine central bankers to join the 10-member rate-setting council this year. Zubelewicz, 37, formerly a professor at a private university with a passion for game theory, said doubts about what the future holds mean the central bank needs to keep a close eye on fiscal policy while leaving its rates unchanged in 2016.

“A wait-and-see approach is most appropriate in the current situation, with the focus placed on vigilant monitoring of next year’s budget,” he said in an interview in Warsaw.

Uncertainty is building after the government swept to power on promises to pursue faster and more inclusive economic development, with plans ranging from the conversion of foreign-currency mortgages into zloty to overhauling the pension system. The Law & Justice-led cabinet has already introduced Europe’s highest bank levy, raised the minimum wage and started a program of child benefits. As a result, Zubelewicz is taking a dim view of the economy, warning that “different risks” may arise for next year’s outlook.

Surprise Pick

Given his background and lack of affiliation with the ruling party, Zubelewicz was the most unexpected choice to join the central bank, and he wasn’t mentioned as a candidate before being nominated by the president. All new rate setters, including Governor Adam Glapinski, were appointed either by Law & Justice or its ally, President Andrzej Duda.

The central bank must be ready for the prospect of spillovers if looser fiscal policy stokes inflation faster than forecast, according to Zubelewicz. Echoing earlier comments by two policy makers -- Eugeniusz Gatnar and Jerzy Zyzynski -- he said the next policy move should be a hike.

“It’s impossible to provide a clue on the timing of changes in rates without more details on fiscal policy next year,” Zubelewicz said.

Longer Pause

Last week, at the first meeting led by Glapinski, the central bank left its benchmark rate at a record-low 1.5 percent for a 16th month. Staff projections showed lower forecasts for inflation and gross domestic product through 2018. Growth in the European Union’s biggest eastern economy hasn’t dipped below 3 percent despite being mired in deflation for two years.

Zubelewicz said he’s confident GDP will expand about 3.5 percent this year, driven by stronger domestic demand. What the economy needs most is investment, higher employment and improved conditions for entrepreneurs, he said.

Poland faces a 35 percent probability that deflation will extend to 2017, which would be the longest period in over six decades, according to the central bank. Still, its staff predicts the likeliest path is for price growth to accelerate to 1.3 percent next year.

Worrying, Irresponsible

In light of that projection, and because “the pace of a rebound in prices may be worrying, cutting the rate now would be irresponsible,” Zubelewicz said. While not benefiting investment, that would risk weakening the zloty and raising the cost of servicing the government’s foreign debt.

The Polish currency is the fifth-worst performer among its emerging-market peers this year with a 3.4 percent loss against the euro. The yield on Poland’s 10-year government bond climbed two basis points to 2.87 percent on Wednesday.

With Glapinski focusing on financial stability in the wake of the U.K.’s Brexit vote, Poland’s central bank is closing the door to monetary easing for now. The new governor has said borrowing costs are at the “right” level.

Nothing short of a meltdown will prompt Zubelewicz to support easing.

Rate decreases are out of the question “unless the economy collapses suddenly and without any warning,” he said. “And even then a cut could be considered only if lower borrowing costs could significantly boost economic growth.”

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