Growing pains
For weeks Finance Minister Grzegorz Kołodko had been waging a campaign to talk down the level of the złoty and entice the central bank into more drastic interest rate cuts. And then his criticisms became more strident, apparently infuriated by the central bank's continuing insistence that it would stick to the path of caution in setting interest rates.
First, though, a fresh area of potential conflict between the government and the national bank was opened up, when it emerged that Kołodko's ministry was working on a scheme to release billions of złoty in paper provisions held by the NBP in revaluation reserves. The funds would be used by the ministry to give a boost to its strained budget. The NBP said that it had not been consulted about any such plan, which would effectively force it to print money as a way of releasing at least part of the €6.5 billion (zł. 27 billion) of provisions that it holds against exchange rate risks on its foreign reserves. However, any such move would represent a major blow to monetary policy.
On the matter of monetary policy, Economy and Labour Minister Jerzy Hausner weighed in on the government's side, commenting that a weaker złoty was key for the country's nascent economic recovery, while further cuts in interest rates were less important. He also said the economic recovery signalled by improving indicators over the last month was not self-sustaining.
MPC member Dariusz Rosati said that predictions for economic growth allowed scope for continuing the policy of gradual, small interest rate cuts. He said GDP was expected to increase to 4% in the fourth quarter of 2003 and to between 3% and 3.5% for the whole year, a rise from 2002 of 1.3%. His comments followed a statement by deputy central bank governor Andrzej Bratkowski, who said, "The level of interest rates is appropriate and reflects the economic situation."
Then Kołodko went on the attack, calling the current level of interest rates "suicidal." Forecasting that inflation would fall to a new low of 0.5% in January, he insisted there was room to ease rates by 300 basis points. "I also have no doubt that the independent central bank will not do this because, in its opinion, it would hurt the economy," Kołodko told reporters at an economic seminar in Warsaw. "The difference between the main central bank rate and inflation amounts to 6%. This is suicidal for Poland's economy and irrationally overvalues the złoty."
First, though, a fresh area of potential conflict between the government and the national bank was opened up, when it emerged that Kołodko's ministry was working on a scheme to release billions of złoty in paper provisions held by the NBP in revaluation reserves. The funds would be used by the ministry to give a boost to its strained budget. The NBP said that it had not been consulted about any such plan, which would effectively force it to print money as a way of releasing at least part of the €6.5 billion (zł. 27 billion) of provisions that it holds against exchange rate risks on its foreign reserves. However, any such move would represent a major blow to monetary policy.
On the matter of monetary policy, Economy and Labour Minister Jerzy Hausner weighed in on the government's side, commenting that a weaker złoty was key for the country's nascent economic recovery, while further cuts in interest rates were less important. He also said the economic recovery signalled by improving indicators over the last month was not self-sustaining.
MPC member Dariusz Rosati said that predictions for economic growth allowed scope for continuing the policy of gradual, small interest rate cuts. He said GDP was expected to increase to 4% in the fourth quarter of 2003 and to between 3% and 3.5% for the whole year, a rise from 2002 of 1.3%. His comments followed a statement by deputy central bank governor Andrzej Bratkowski, who said, "The level of interest rates is appropriate and reflects the economic situation."
Then Kołodko went on the attack, calling the current level of interest rates "suicidal." Forecasting that inflation would fall to a new low of 0.5% in January, he insisted there was room to ease rates by 300 basis points. "I also have no doubt that the independent central bank will not do this because, in its opinion, it would hurt the economy," Kołodko told reporters at an economic seminar in Warsaw. "The difference between the main central bank rate and inflation amounts to 6%. This is suicidal for Poland's economy and irrationally overvalues the złoty."
