Polish central bankers sow confusion

By bne IntelliNews October 14, 2014

Tim Gosling in Prague -


Less than a week after finally agreeing to cut interest rates, Poland's central bankers are back to bickering and sowing confusion over further steps to support the stuttering economy.

With the recovery going strongly early this year, the National Bank of Poland's traditionally turbulent Monetary Policy Council (MPC) briefly reached unanimity, opening the way for Governor Marek Belka to announce it would offer forward guidance. With the economy now stumbling, such consensus has gone out of the window. Conflicting signals mounted on October 13 following the previous week's surprise of a 50-basis-point cut to push the key interest rate down to 2%.

Following the October 8 cut, Belka suggested more easing could be on the way due to the effects of economic weakness in the Eurozone and the Ukraine crisis on GDP growth and inflation. He reiterated that view in an interview published by Gazeta Wyborcza on October 13, but warned investors not to assume the move would mark the start of an aggressive easing cycle.

"It may be just one more cut," he said. "If it only depended on me, I would strongly concentrate in time all changes of rates, and then observe (their impact)." The NBP governor suggested that with the European Central Bank and other regulators in ultra-dovish mood, Poland cannot allow the zloty to gain. Belka has previously insisted that he wants to see all necessary monetary easing completed swiftly.

However, at the same time, other members of the MPC were busy offering conflicting views, illustrating the difficulty of reading the current macroeconomic situation. Elzbieta Chojna-Duch told PAP news agency that the NBP should now wait. "One has to stress that the October rate cut was deeper than expected," she said. "It would be good if we reserved some time now to assess its effects".

That represents a change of tone for Chojna-Duch, who has until recently been one of the most dovish on the MPC, although she remains reasonably consistent in her opposition to the usually hawkish Belka.

Adam Glapinski backed the call for caution, according to Reuters, saying there is now no room for further easing.

With a wild swing to the other extreme, Andrzej Bratkowski told Bloomberg in an interview on October 11 that the MPC may need to cut up to 75bp more as economic growth threatens to dip below 3% in 2015. "The economic slowdown is a fact," Bratkowski told the newswire, while ruling out a cut larger than 25bp at the next MPC meeting. "There is no longer any illusion that what we've been seeing is only a temporary wobble."

Seeds of confusion

The uncertainty is understandable. Industrial production and export data for August out of Germany and Central European peers saw hard falls across the month, sowing seeds of concern. However, there was little alarm because economists insist that the figures were heavily swayed by summer holidays. The consensus is that data for September will see a huge upswing, which has only helped extend the lack of clarity across the region.

Indeed, on October 13 a senior official from Hungary's Magyar Nemzeti Bank (NBH) strongly suggested the central bank has no plan to return to monetary easing despite a shocking September inflation report. With CPI reported at -0.5% on October 10, the likelihood of further cuts was raised by many.

Yet Deputy Governor Adam Balog claimed third-quarter inflation (-0.1%) was just a tad behind the MNB's estimate, reports Portfolio.hu. It may be necessary to maintain the base rate at its current level even up to the end of 2015 in order to reach the inflation target, he added.

Poland, meanwhile, issues macroeconomic data out of step with regional peers. With the next rate setting meeting not until early November, it will have the chance to absorb both its own August data and September figures from the surrounding region before a decision has to be announced.

Despite its recent policy to offer forward guidance, the difficulty of reading the economic environment as the Eurozone slows and the effects of Ukraine crisis and Russian sanctions slowly emerge, puts the NBP back in familiar territory, with individual MPC members lobbying for their varying stances via the press.

Poland has lagged the likes of the Czech Republic and Hungary on key data such as PMIs and industrial production in recent months. However, noting that the ratio of Polish exports heading to Russia is relatively small, and that the economy is the least dependent of the Visegrad Four on Eurozone demand for exports, analysts have been stumped to explain Poland's struggle to keep up.

Unsavoury business

At the same time, as it awaits the major numbers, there are signs for Poland that domestic demand - on the part of consumers anyway - and the vital auto sector remain somewhat buoyant. Car output and registrations are up recently, while sales of consumer goods are reported to have jumped.

Chojna-Duch said she will be looking to the NBP's new inflation and growth forecasts due in November, suggesting rates should be maintained unless they offer very strong arguments for further easing. Bratkowski said a "base-case scenario" of slowing growth next year isn't "80% certain" and negative trends may yet reverse. "If we get better data, it may turn out that we won't get to the limit of cuts that's been mentioned and we'll do less," he summed up.

All that aside, Belka's comments remain the most important signal. Commonly accused of delaying action throughout the crisis, the hawkish central bank governor has now suggested several times that he wants the unsavoury business of monetary easing over and done by the end of the year.

He certainly has some catching up to do. Ahead of the cut in September, many analysts had been calling for a cut for months. However, the "Waitergate" scandal over the summer - in which Belka was accused of trading economic support for political influence within the government - is thought to have warded off an earlier move.

That leaves most money on one more cut this year, and likely at the earliest opportunity in November. "The comments of two of the most dovish members of the MPC (Bratkowski, Chojna-Duch) suggest that, at least for the time being, a 25bp rate cut at the November MPC meeting seems to be a more likely scenario than another 50 bps cut," write analysts at KBC. "From this perspective, this week's data on inflation and industrial production can play an important role in determining the final MPC decision."


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