Central Banker Can't Find Yes/No Answer to Polish Rate Query

Updated on
  • Kropiwnicki can’t take definite stand on Polish 2018 rate bias
  • Policy maker sees little in July projection for inflation, GDP

Polish central banker Jerzy Kropiwnicki thinks now isn’t the time to be certain about anything.

While sharing much of Governor Adam Glapinski’s optimism about Poland’s economy, Kropiwnicki isn’t content with the level of domestic investment and expects wage pressure to emerge from a tight labor market. But his biggest worry is the unsteady global outlook, which is why he can’t commit beyond this year to extending what’s already Poland’s record-long pause in interest rates. The governor has been reiterating that no rate increase may be warranted until the end of 2018.

“For the time being, I don’t see indications for a definite ‘yes’ or a definite ‘no’ to the possibility of dropping the wait-and-see bias next year,” Kropiwnicki said in an interview in Warsaw. “I’m really far from thinking that the situation in the world economy is stable.”

The combination of a rebounding economy and inflation in check is putting Poland in a policy sweet spot for the central bank, which Morgan Stanley says is “more homogeneous” than its predecessors. But a note of dissent from Kropiwnicki calls into question the governor’s mood of untroubled self-assurance in the past year.

While growth in gross domestic product shot up to 4 percent last quarter, from 2.5 percent in the previous three months, investment continued to shrink and the contribution of inventories to economic expansion was at 0.7 percentage point. A price surge at the start of the year pushed real interest rates below zero, leading to the longest ever period that the central bank’s benchmark has remained negative when adjusted for inflation. Borrowing costs have been on hold since a cut in March 2015.

“Domestic investment remains a cause of concern for me,” Kropiwnicki said. “For the time being, the data stay unclear, and if it turns out that those inventories refer to already-made products -- that would be worrying.”

Click here to watch Glapinski discuss Polish rates after June’s meeting

For Glapinski, the outlook for the European Union’s largest eastern economy is as good as it gets. GDP is on track sustain its 4 percent growth the entire year, while inflation is at no risk of breaching the central bank’s target of 2.5 percent. Consumers express confidence the like of which Poland hasn’t seen since the end of the Second World War, according to the governor.

Areas of economic strength that Kropiwnicki says are “making him feel good” range from the labor market and manufacturing to foreign trade and the budget. But as one of the co-founders of the Solidarity union, which helped topple Communism in Poland, the central banker says he’s surprised that workers haven’t been demanding higher pay in the face of falling unemployment and accelerating growth. In such an environment, “inflationary tensions should show up.”

Wages soared 5.4 percent in May from a year earlier, the fastest increase since August 2011, while corporate employment added an annual 4.5 percent, the Central Statistical Office said on Monday.

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Before the next rate meeting in July, the Monetary Policy Council will get a new projection of inflation and GDP from the central bank’s staff, which some members say will be decisive in shaping their approach. 

Kropiwnicki isn’t among them. That’s because he believes the new forecasts will show an outlook for price growth similar to the previous view from March, which suggested the annual index will be at 2 percent in 2017-2018 before rising to 2.3 percent in 2019. But the prospects for GDP growth could become clearer under the updated projection, he said.

“I’m skeptical about model-based predictions and I watch them only with an intellectual interest,” Kropiwnicki said. “They reflect reality to a minor extent” only.

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