Poland's hot economy to force rate hike

By bne IntelliNews April 26, 2007

Jan Cienski in Warsaw -

Slawomir Skrzypek

Slawomir Skrzypek became Poland’s central bank governor earlier this year because the ruling Law and Justice party was enormously dissatisfied with Leszek Balcerowicz, his predecessor, renowned for his hawkish views on inflation and his willingness to raise interest rates at the first twitch of price rises.

But Skrzypek’s dovish tendencies will be sorely tested this week, when the interest-rate setting Monetary Policy Council meets to decide whether or not to take action over the growing signs that Poland’s economy is overheating.

The Polish statistical agency on Monday released a reassessment of economic growth for last year, finding it had actually expanded by 6.1%, and not 5.8% as the agency had earlier said. Growth for the first quarter of this year is expected to be about 7% of gross domestic product. Poland's net inflation rate rose to 1.7% on the year in March, up from 1.6% in February, still below the target rate of 2.5%, but getting higher.

Wages rose by 9% in March compared to the same month a year earlier. Despite that increase, many employers, particularly in the construction industry, are having trouble finding workers, one of the consequences of the massive labour migration that has seen more than a million Poles decamp for higher salaries in western Europe. The Polish Confederation of Private Employers estimates that the economy needs an immediate injection of as many as 200,000 workers.

Those signals have persuaded most of the 10-member Monetary Policy Council that they should increase interest rates later this week. Most analysts expect the MPC to hike rates by a quarter point, to 4.25%, the first rise in more than a year.

“It appears that during the next session of the MPC, there will be a tough discussion between the advocates and opponents of raising interest rates,” says Dariusz Winek, chief economist for BGZ bank.

But being outvoted by the MPC presents Skrzypek with political difficulties. He was chosen by Poland’s ruling Kaczynski brothers, Lech, the president, and Jaroslaw, the prime minister, despite have almost no background in economics, because he was supposed to be loyal and because he would lessen the chances of overcooling the economy, which would have severe consequences for the already shaky popularity of the ruling coalition.

The Kaczynskis were scathing in their assessment of Balcerowicz, feeling he overdid interest rate increases at the turn of the century, slowing the economy almost into a recession.

Skrzypek sent an unusual signal to the MPC a couple of weeks ago, in the form of an interview with the usually pro-government Dziennik newspaper.

In the interview he stated several times: “Currently there are no conclusive signals that would indicate that the current interest rate needs to be corrected.”

According to Janusz Jankowiak, chief economist for the Polish Business Roundtable, Skrzypek was sending a message to the rest of the MPC that if it delayed an interest rate increase for a couple of months, he would then fully back such a step, which would avoid the embarrassment of the new central bank chief – who has been in the job only since January – being outvoted by the Council.

Ignoring Skrzypek, warns Mr Jankowiak, could create enormous problems for the Council from the government.

But stepping back from raising rates – a decision that the market has already factored in - could create worries about the Council’s political independence.

“If there is no increase this month, it’s difficult to imagine how tough the communiqué would have to be” to retain the MPC’s credibility,” says Mr Jankowiak. “The governor’s success (no rate increase) would be a defeat for the Council.”

Even if the MPC votes to raise rates, the intense discussion provoked by Skrzypek’s obvious reluctance to play along means it is unlikely to be followed by more hikes in the near future, analysts say.

That alone could be worth the steep price the Kaczynskis paid for Skrzypek to take over Poland’s central bank.

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