Polish Central Bankers Nix Target Shift as Deflation Deepens

  • Proposal to cut inflation target opposed by most policy makers
  • Topic ripe for discussion as deflation wanes, Zubelewicz says

Most Polish central bankers are happy to ride out what could be five years of below-target price growth rather than tinker with their aim.

A proposal by Kamil Zubelewicz to lower the goal, set at around 2.5 percent 12 years ago, isn’t winning the support of his fellow policy makers, Grazyna Ancyparowicz and Jerzy Osiatynski. The debate is unfolding as record deflation is set to enter its third year. Data released Friday showed that consumer prices slid more than forecast, declining 0.9 percent in July from a year earlier. The median of 25 estimates in a Bloomberg survey was for a drop of 0.8 percent, the same as in June.

Grazyna Ancyparowicz

Photographer: Piotr Malecki/Naradowy Bank Polski

“Statistics will show higher price growth already at the end of this year,” Ancyparowicz said in an interview in Warsaw. “A revision of the inflation target is groundless. If we’re in a disturbed magnetic field, we’re not throwing away a compass -- the inflation target-- but switching to other instruments.”

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 European Central Bank’s target of just under 2 percent for more than three years. The Reserve Bank of Australia’s outgoing Governor Glenn Stevens has defended its target after suggestions that it should be changed. Policy makers in Japan set a higher goal of 2 percent in 2013 as they battled to end two decades of deflation.

In many developed economies, a 2 percent pace is seen as optimal for encouraging companies to invest and consumers to spend. Growth in Poland, the European Union’s biggest eastern economy, hasn’t dipped below 3 percent despite being mired in deflation since July 2014, an unprecedented stretch that’s defied expectations and now reached the longest in six decades.

Inflation has been below 2.5 percent since December 2012, falling short of the 1.5 percent lower end of the central bank’s target range since February 2013. It won’t return to 1.5 percent until 2018, according to the bank’s latest projection. Borrowing costs have remained on hold since March 2015.

‘Paradoxically’ Good

“Paradoxically, the period when we exit deflation may be a good time to have this discussion, as society is benefiting from lower inflation,” Zubelewicz said in an interview. “In the longer term, lower inflation means a lower risk for economic activity and better investment conditions.”

Other rate setters aren’t sold on the idea. Eugeniusz Gatnar and Jerzy Kropiwnicki have both expressed opposition. Lukasz Hardt in May said that no change is the “most probable” outcome.

Osiatynski, the only member of the 10-person policy council to remain after a changeover this year, allows that while discussing the target level is possible, Poland’s deflation is “imported” and there’s no grounds for amending the goal.

“Let’s not provoke any changes that could trigger unwanted market reactions,” Ancyparowicz said. “That’s what I’m concerned about the most.”

The central bank’s latest projections show consumer prices dropping an average of 0.5 percent this year, with a chance of above 30 percent that the declines will extend into 2017.

New Guidelines

In September, the rate-setting board will review its monetary-policy guidelines for 2017. Central bankers including Gatnar have said that little is expected to change from this year’s approach. The document now states that the Monetary Policy Council sets as its “primary objective” the stabilization of inflation at 2.5 percent, plus or minus one percentage point, in the medium term.

Domestic demand is set to rev up again as unemployment falls to a record and wages jump. Stronger consumption will feed into inflation, according to Piotr Kalisz, chief economist at Citigroup Inc.’s Bank Handlowy SA in Warsaw.

The new governor, Adam Glapinski, has been averse to consider any policy shortcuts, saying “the central bank doesn’t need any revolution.” It’s a sentiment echoed by his predecessor, Marek Belka.

“Lowering the inflation target weakens the MPC’s reputation,” Belka said in an interview. It makes no sense as no one does it even as they are in a similar situation. Even more important is that we’re seeing price increases on the horizon.”

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