What is the new RPP going to do?

 

In late 2008 and early 2009 central banks worldwide and the Polish Monetary Policy Council (RPP) took firm action in response to deterioration in the economic environment and the concurrent improving outlook for inflation (or even a threat of deflation in some countries). Besides interest rate cuts, which in many countries, including Poland, were slashed to record-low levels, central banks also took unprecedented measures with a view to stabilising financial markets and stimulating economies (a “quantitative easing” of monetary policy). The year 2010 will probably bring a reversal of these trends. The outlook for inflation in 2010 is apparently positive, but central banks will likely focus on how the situation can develop in the medium term. Continued economic recovery and the risk of emergence of inflationary pressures are prone to trigger a series of interest rate hikes in Poland. This scenario will be supported by the “normalisation” of interest rate levels abroad, which is likely to be preceded by the gradual discontinuation of quantitative monetary easing. We believe that interest rate hikes in the eurozone and the US will not start before the end of 2010, while 2011 will see the continuation of the upward trend (to just under 3% both in the eurozone and in the US).

 

Right now it is hard to determine whether RPP will decide to act faster and increase interest rates before the European Central Bank (ECB) and the US Fed. Making predictions about activities of the new RPP and interest rate changes in Poland is difficult due to the much delayed appointment of the RPP members. Firstly, the names of some RPP members were still unknown in the last days of January. Secondly, since we finally got to know the names of the new RPP members at the last minute, we are not yet aware of their views on monetary policy and, consequently, we are unable to make out the potential balance of forces within the RPP when voting on changes in monetary policy parameters. Still, it appears that the new RPP members will be at least as divided in their views as the previous RPP.

 

An analysis of all the voting records of the previous RPP demonstrates that Jan Czekaj and Andrzej Slawinski were in the middle of the scale in terms of restrictive monetary policy views. The former was the only RPP member who always voted in line with the decisions of the RPP, while the latter was a member whose vote was almost always consistent with the RPP’s decisions. The stance taken by Slawomir Skrzypek, President of the National Bank of Poland (NBP), was also important as he had the casting vote in the event of a tie. Due to the delayed appointment of the new members and the fact that many of them have demonstrated relatively limited involvement in monetary policy, we will get better acquainted with the new members’ views on interest rates only in a few months’ time. But even now we can try and place the RPP members along the restrictiveness spectrum. Based on their comments on economy and the interest rate policy, we can make conjectures about the type of monetary policy that the RPP members elected by the parliament and nominated by the president will prefer. Views of some of them can be easily traced through their actions and past experience.

It appears that Jan Winiecki will be the thorough-going hawk of the RPP, and he can be more radical than even the most hawkish members of the previous term of the RPP. Likewise, Andrzej Rzonca, who is a close associate of Leszek Balcerowicz, the NBP’s previous president, will likely join the hawkish wing of the new council, but it is not that clear as he was mostly involved in fiscal policies. Among the candidates, Andrzej Bratkowski, the NBP’s former vice-president in charge of economic research, appears to have the most extensive experience in monetary policy. At the outset, he can be described as a moderate hawk, though the last of his comments were not so unambiguous in this respect. Further, little is known about the monetary policy views of Anna Zielinska-Glebocka, the Civic Platform’s MP, but, notably, in one of the interviews she described herself as quite hawkish. Thus, we would have four hawks in the new council. But the fact that they could be in favour of even more restrictive policies than their predecessors does not mean a lot to the shape of the monetary policy of the RPP as a whole. In the first place, the candidates nominated by the President will be more likely to support the dovish wing. As there is also president Skrzypek at this end of the restrictiveness spectrum (judging by how he voted during the previous RPP’s term), this faction will only need one additional vote to secure the majority.

Thus, the votes of Elzbieta Chojna-Duch and Jerzy Hausner can play a pivotal role in adopting decisions regarding interest rates. In the past, the Polish Peasants’ Party candidates were usually doves in the RPP (Miroslaw Pietrewicz and, earlier, Wieslawa Ziolkowska). It is hard to say whether Elzbieta Chojna-Duch will follow this pattern. Either, it is not easy to decide if Jerzy Hausner (deputy PM of the Democratic Left Alliance-Polish Peasants’ Party government) will be a dove or a hawk. At any rate, it appears that it is too early to claim that the new council will be any more hawkish than the previous one.

In addition to the issue of interest rates, a question arises about the view of the new RPP members on the foreign exchange policy. It appears that in appointing the new members, the parliamentary coalition was strongly guided by their view on the eurozone entry. In this regard, the six candidates nominated by the Civic Platform-Polish Peasants’ Party Coalition will likely speak in unison. For obvious reasons (i.e. not fulfilling the relevant fiscal criteria in the coming years), this will remain an issue of secondary importance (perhaps even until the nomination of the new NBP president in three years’ time). A statement made by Andrzej Bratkowski can be characteristic of the new RPP’s approach to the zloty exchange rate, as he said that “we should play in such a way as to use the zloty’s strengthening, which will accompany the widening interest rate disparity between Poland and the eurozone, as an inflation stabilising factor, not a constraint on the economic growth”.

 

Apart from personal preferences and subjective views of individual RPP members, information from the economy and analyses and forecasts drafted by the NBP will play a key role in the RPP making its decisions. At the next meeting scheduled for 23-24 February 2010 (which will be the first meeting of the new RPP), a new inflation projection will be presented to the RPP. The previous projection of October 2009 assumed inflation growth above the NBP target (2.5% y-o-y +/- 1 p.p.) in late 2011. However, afterwards there was improvement in expectations regarding the economic growth in the medium term, so the NBP can project higher GDP growth and inflation. But it appears that the general uncertainty regarding the development of the economic situation and the significant risk of slow economic growth will prevent the RPP from shifting the informal monetary policy bias from neutral to restrictive. Therefore, we should not expect interest rate hikes at any of the initial meetings of the new RPP as the first interest rate rise will not be earlier than one month or later after the shift of the informal bias in monetary policy to restrictive.

 

An analysis of the new RPP’s monetary policy prospects should take account of the performance of the zloty exchange rate. It is so because the overall restrictiveness of monetary policy is conditional not only on the level of interest rates but also on exchange rates. In this context, it should be noted that the expected appreciation of the zloty will to some extent help out the central bank in tightening the monetary policy. The stronger zloty will curb current inflation directly by impacting prices of imported goods and services. Additionally, inflation will be restrained by the fact that the stronger zloty can cut into the pace of economic activity in Poland by tempering the competitiveness of Polish companies in international markets, which will mean reduced attractiveness of Polish exports and a concurrent ousting of the domestic produce by imports.

 

In addition to the strengthening of the zloty, other factors which will strongly help reduce inflation during 2010 will include rises in the regulated prices (chiefly electricity) lower than in 2009 and slower growth in the excise tax rate. Consequently, in mid-2010 consumer price index (CPI) can decline to around 1.5% y-o-y, which marks the lower bracket of the inflation target range set and approved by the NBP. Although the monetary authorities are more concerned about medium-term prospects for price pressures in economy rather than the current inflation level, a psychological effect of such a steep fall in CPI should stop the RPP from embarking on a round of interest rate hikes so soon. Thus, we forecast that interest rates will not rise in Poland before the final quarter of 2010 and the reference rate at the end of the year will be 4% compared to the record-low level of 3.5% at the moment. The subsequent years will see further interest rate rises accompanied by economic recovery and growing inflation pressures, strengthened by the concern of the new RPP about meeting the inflation criterion for joining the eurozone.

 

 

Piotr Bujak

Senior Economist, Bank Zachodni WBK