RPP cuts rates as inflation heads south
The Monetary Policy Council (RPP) last week slashed interest rates for the fifth time this year, bringing the 28-day intervention rate to its lowest level since August 1999, but also leaving room for another cut if the state budget shapes up, economists said.
The 150-point cut followed expectations and reflected September's historically low inflation and weak domestic demand, encouraging budget pronouncements by Finance Minister Marek Belka.
Another rate trim could follow a clearer budget picture from Belka.
"We have a very unclear situation on the budget," said Iwona Pugacewicz-Kowalska, an economist at Bank Pekao. "This is a very important issue for the Monetary Policy Council, but (last week) they left the door open for further cuts, especially when they have more information about the budget."
Belka has offered a broad spending outline, committing to a central budget deficit at or below zł. 40 billion ($9.7 billion) - the most the country could finance without damaging the economy. But exactly how he will get there remains uncertain. The departed Solidarity Election Action (AWS)-led government left a 2001 budget that may need to be revised for a second time this year, and a 2002 plan that newly installed Democratic Left Alliance (SLD) said is unusable.
Even with the uncertainty, the RPP said the current economic factors allowed the move to a 13% from 14.5% 28-day intervention rate. As recently as February, the 28-day rate was 19%. The last time central bank interest rates were so low, in April 1999, inflation was around 6.5%, but in September it was 4.3%.
National Bank of Poland (NBP) President Leszek Balcerowicz also credited the new government's proposed spending levels as an impetus for the cut, indicating that he thought difficult but important decisions would be implemented. The RPP's rate decision noted the deficit limit and a zł. 183 billion ($43.57 billion) cap on spending for 2002.
While concerned with the state budget, economists also cautioned that Poland's economic deficit could make it difficult for the RPP to cut rates in the future. The budget gap better reflects the impact of the public sector on demand by taking into account off-budget items such as the Social Insurance Administration (ZUS), health insurance institutions and municipal government expenditures but not state transfers of insurance premiums to private pension funds.
The off-budget expenses are a special concern. According to the original 2001 budget plan, about zł. 150 billion ($35.7 billion) in public money is routed through off-budget funds that are not under the Finance Ministry's control. By comparison, the central budget was pegged at zł. 182 billion ($43.3 billion), though it has been amended.
The economic deficit, closely watched by the RPP, was 2.7% of gross domestic product in 2000 and is supposed to reach 4.3% in 2001. Anything more than 4.3% could quash hopes for another rate cut.
"I think the problem is that everybody' s talking about the central budget," said Maciej Reluga, senior economist at ING Bank. "But it's not difficult to bring the central budget deficit to zł. 40 billion - that can be achieved by taking away subsidies to local governments but then they can turn around and borrow.
"I think the situation is not that dangerous," he added. "I don't think there's a risk of a crisis in public finances. But the economic deficit is a risk."
Pugacewicz-Kowalska said that an economic deficit of 3-4.3% is realistic, but added that "this budget depends on particular solutions, whether they are going to look for revenue by raising taxes or to savings, and especially social outlays."
Jeff Sparshott
