RPP cuts interest rates again
The Monetary Policy Council (RPP) last week took the knife to interest rates for the sixth time this year, but signaled that further cuts would be unlikely in the near future.
The RPP has cut 7.5 percentage points off of interest rates this year as inflation has fallen dramatically, the economy has sputtered and political pressure has mounted for monetary loosening. The central bank's main interest rate is now at 11.5%, the lowest level since before 1997, when the National Bank of Poland's (NBP) charter was amended and it was mandated with maintaining price stability.
"The cut was in line with expectations," said Iwona Pugacewicz-Kowalska, an economist with Bank Pekao. "But now it looks like interest rates will remain stable for a while."
In cautioning against hopes for continuing reductions at the same pace, the RPP pointed to uncertainty with the government's budget and noted that the effect of new government taxes is unknown.
Despite a warning that uncertainties with the budget and government policy could halt cuts in the near future, economists noted that bad budget figures did not prevent a rate cut last week.
"The words of the RPP are losing some value," said Mateusz Szczurek, a senior economist with ING Bank. "The budget doesn't seem to matter much for rates."
Already in 2001, the last government's inability to put together an accurate budget has forced two revisions to this year's deficit targets. The Democratic Left Alliance (SLD)-led government, in office since October, last week approved the second amendment to the 2001 budget and increased the deficit by zł. 3.8 billion ($926 million). With the change, the budget deficit climbed to 4.5% of gross domestic product (GDP), up from the first revision's 3.9% and the original 2.6%.
"One could say that what's going on with the budget right now is strangling the economy," Szczurek said. "Because budget financing needs are so big the banks have no incentive to compete and extend credit to the private sector."
The RPP noted that the full impact of the rate cuts on the economy has not yet been felt and cited the steep series of small cuts as a reason for caution.
"When making decisions in the future the RPP will bear in mind the large scale of the interest rate fall and the fact that their influence on the future situation is not clear," the 10-member group said in a statement.
While the overall tide of cuts is significant, economists said they correspond to the country's economic situation, especially low inflation. The country's consumer price index hit 4% in October, a record low for the post-transition economy, according to the Central Statistical Office (GUS).
"The basis for this cut was the development with inflation," Pugacewicz-Kowalska said. "There has been a really significant drop."
Despite the good inflation news, all eyes return to the budget when looking for lower interest rates.
Jeff Sparshott
