Fears of external inflationary pressures begin to play a role in RPP thinking

The Central Statistical Office (GUS) announced that the consumer price index (CPI) dropped to 1.2% in August. Markets failed to react to the news as the figure had been widely expected for over a week. However, a Central Bank member said on Monday that the Monetary Policy Council (RPP) should remain cautious as a military conflict between the United States and Iraq could generate new inflationary pressures. Dariusz Rosati, a member of the RPP, said that the outlook for inflation was benign in the near future, but warned that possible external price shocks could change the situation. Analysts believe that uncertainty over future fuel prices, (should tensions between the U.S. and Iraq grow and disrupt oil supplies), could keep the RPP from cutting interest rates at its September 24-25 meeting. Finance Minister Grzegorz Kolodko pledged to narrow next year's deficit below this year's zl. 40 billion (5.4% of GDP), which could swade the Monetary Council to lower interest rates. "It is obvious that some spending cuts will be required and it would be best to reduce social expenditures. As this may be politically too difficult, the unfortunate and easiest choice for the government would be to slash investments," said Rosati. (Reuters, Prawo i Gospodarka, pp. 1, 7) M.M.