Polish central bank governor wrestles with rate setters for more cuts

By bne IntelliNews November 26, 2014

bne IntelliNews -


Polish deflation shows that there is room for further interest rate cuts, the governor of the National Bank of Poland (NBP) said in comments published on November 25. The claim comes as Marek Belka continues to try to reassert influence within the Monetary Policy Council (MPC).

Belka sought to increase the pressure for a more dovish policy in an interview with tabloid Fakt. The comments repeated calls for more easing made the previous day in an interview with Reuters in Vienna. 

In that November 24 discussion, Belka surprised by suggesting deflation is the primary focus within the MPC. That contradicts the last official MPC statement, which suggested that most members were now watching growth data.

In the Fakt interview, the NBP governor admits that the MPC he formally heads remains divided over the issue. Indeed, just a few days before Belka's renewed push, the MPC's Jan Winiecki insisted there is no room for further interest rate cuts.

Surprise, surprise

With low demand depressing inflation across Europe, Poland's CPI was a negative 0.6% in October, following price falls of 0.3% in the previous two months. The current run is the country's first deflation in 40 years.

Early this month, the MPC surprised as it kept the benchmark rate unchanged at a record low 2%. Most had expected a cut to follow the equally surprising reductions in October, when the MPC chopped 0.5pp from the key reference rate and 1.0pp off the upper ceiling lombard rate for retail loans.

Belka's guidance in October that he favoured "concentrated" cuts drove much of the expectation in November. A majority of analysts also continue to call for further action from the NBP to fight inflation and offer the economy stimulus, with the twin shadows of slowing Eurozone growth and the uncertainty surrounding Russia and Ukraine lengthening to threaten exports.

However, better-than-expected quarter three GDP growth has offered support to the hawks.  Unemployment falling to five-year lows, and rising retail sales, suggest an uplift for domestic demand, which is vital in the face of the external threats. A majority of rate setters subscribe to the theory therefore that deflation is driven by forces outside the control of monetary policy.

This time it's personal

Analysts say that the hawks will likely remain in the ascendancy for now, but there is rising concern that the notriously rambunctious MPC may be split not only by the economic outlook, but also personal grudges and other pressures.

The "Waitergate" tapes in the summer featured Belka not only apparently bargaining monetary policy for political influence with senior government officials, but also casting vicious personal barbs at MPC members. Unnamed sources told Bloomberg this month that one member of the rate setting committee "won’t even look at the governor".   

On top of that, many suggest the government now wants to see rates held for because of concerns over state debt levels to be reported at the end of the year. A rise in the value of the zloty - a trend Belka told Reuters he "fears" - would lower state debt levels because the majority is denominated in foreign currency.

Hungary, which held rates at 2.1% on November 25, is in the same boat. Many analysts suggest the NBP and NBH will be influenced as much by each others' monetary policy as economic conditions and the ultra-dovish stance of the European Central Bank.

"We do not expect the NBH and the NBP to cut rates before the end of this year at least," suggests KBC. "Apart from the ambiguous macroeconomic signals and central bankers’ rhetoric, there is one seasonal factor that may counteract such a move ... the annual reporting of public debt."

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