RPP credibility in doubt as interest rates increase

   The Monetary Policy Council (RPP) may have had no other option than to raise interest rates at last week, but it forced itself onto a tricky road of dictating policy to the government, analysts said.

   The 10-member council ordered a widely expected, 150 basis-point rise in borrowing costs, arguing it had to prevent a recent surge in the price growth index from fueling dangerous inflationary expectations.

   The July inflation jump to year-on-year 11.6% stemmed largely from government intervention in the food market, fuel and telecom monopolies, and a restrictive labor market, all of which are beyond its control, the RPP said.

   But analysts said the RPP, which uses year-end price growth as its monetary policy yardstick, felt compelled to defend its wilting credibility as it faced the second year in a row of badly overshooting the December inflation goal.

   "They put themselves into a corner with the whole series of rate hikes. It would have been more obvious to raise the inflation target than to defend an unrealistic goal," said Beshara Madi, an economist at Morgan Stanley Dean Witter in London.

   Since last September, the RPP has raised interest rates by a total of six percentage points in four strokes, struggling to contain the flyway price growth. The Polish consumer price index bottomed out in February 1999 at 5.6% and has risen steadily since.

   "The RPP hedged itself. They were not prepared to assume the risk of being accused of not taking action in the event there was a crisis," said Zsolt Papp, ABN Amro economist in London.

   Analysts also said the rate rise, which brought nominal rates to the stiflingly high 19-23% and real rates to 7%, was also a warning sign to the government to join the fight against inflation.

   Central bank head and RPP chief Hanna Gronkiewicz-Waltz said the council would monitor the government's anti-inflationary efforts closely and would, for now, maintain its tightening bias for future policy.

   But analysts shrugged off the RPP's call for anti-inflationary measures from the government as falling on deaf ears while the Cabinet remains torn between protecting beleaguered farmers and price stability.

   The Cabinet also faces opposition in the legislature where many would like to see elections moved forward from the fall

   of 2001.