Lower interest rates unlikely to cool down political rhetoric

Another cut in interest rates this week by the Monetary Policy Council (RPP) would do little to calm the ongoing dispute over the central bank's independence, economists said last week. The RPP is widely expected to cut interest rates by 50 basis points during its monthly meeting this week, economists said. The move would maintain a measured approach that has more than halved National Bank of Poland interest rates through the last 16 months. The cuts have mirrored falling inflation, which hit another post-1989 low in May. But the Democratic Left Alliance (SLD)-led government has made interest rates a focus of economic policy and is unlikely to relent following a small cut, economists said. "The government will always want more," said Jacek Wiśniewski, head of research at Bank Pekao. "(It) would want something like 200 basis points." The SLD and its coalition partners in Parliament said the central bank's rate-setting approach is too reserved for existing economic conditions. Low inflation - 1.9% in May - high unemployment, a strong currency and stagnant gross domestic product growth all leave room for deeper cuts, politicians said.

Mandate for change Last month the Sejm debated legislation to modify the NBP's charter and the RPP's approach to monetary policy. The SLD last week announced it would sponsor a bill to increase the number of RPP members. Meanwhile economists agree that there is room for another cut. "There is flexibility for 50-100 basis points," said Jarosław Deryło, an adviser to the Adam Smith Institute. "The inflation rate is at the lowest level of expectation," Wiśniewski said. "I think they should cut by 100 basis points." Lowering interest rates can stimulate the economy and fuel inflation by making money more readily available on the open market. But Poland's recent history shows that interest rate cuts are not the best way to help the economy, economists said. The RPP missed its inflation targets in 1999 and 2000, and eventually watched inflation climb to 11% following an overly ambitious cycle of monetary easing that helped fuel consumption. To compensate, the RPP set the central bank's main interest to 19% as recently as February 2000. Today the bank's main rate is 9%. Observers said that the RPP has tried to remain impartial despite calls to pack it with new political appointments. "The RPP has a job to do," Deryło said. "Its job is to fight inflation." The government should stick to budget concerns rather than comment on monetary policy, he said. "It's a case of the plumber commenting on what the surgeon should do," he said. - Staff report