RPP defies predictions, cuts interest rates again
The Monetary Policy Council (RPP) (http://www.nbp.pl/home_en.html) knocked another 100 basis points off interest rates last week for the second time in two months, but the council and analysts indicated that further reductions would be slower in coming.
"We expect rates to be on hold for a couple of months," said James Owen, a senior economist with SG Bank.
The RPP cut the 28-day money market rate to 17%, the rediscount rate to 19.5% and the Lombard lending rate to 21%. With the move, the council is aiming to hit its target of 6-8% inflation for 2001. Consumer price index figures from January and February have been within that range. Independent forecasts project year-end inflation below 6%.
"We cut rates because inflation fell quicker than expected and meeting the lower end of our inflation target ... is increasingly probable," said Leszek Balcerowicz, National Bank of Poland president and chairman of the RPP, at a press conference Wednesday.
RPP member Dariusz Rosati indicated that further cuts may be limited, noting that hefty rate reductions discourage savings. "We have gone through this kind of lesson two years ago. We don't want to repeat it," he said, referring to a series of significant moves in 1998 that the board later had to undo.
SG Bank projects two more 100 basis point cuts for the year, one in the early summer and one prior to this fall's elections, as long as food prices remain in check and the government can manage revenues and expenditures. "This is all on the assumption that the budget does not blow out of control," Owen said. Other opinions vary. Bank Handlowy, for example, sees more room for lower rates, and Goldman Sachs less.
The RPP also sounded a note of caution on the state budget, which has already reached more than half of its deficit target for the year and is having a hard time meeting revenue expectations, in part because of lower than projected tax collections due to a slowing economy and in part because of questionable revenues from the sell-off of state assets.
"The council sees a real threat of exceeding the economic deficit of 1.8% of GDP in 2001," the RPP said in a statement. "An increase in the economic deficit would be negative for inflation."
Owen said that the budget picture depends on what happens to the economy in the second half of the year. "If there is a pickup in domestic growth and the slowdown in Western Europe is limited, then I think it is possible the government can keep to its targets," he said. "What I think is far less likely is that the overall economic deficit target will be met."
This fall's election casts additional uncertainty on the situation. "The problem is that the government in power for the last three months will be different from the government for the first nine months," Owen said. "It is not at all clear what will happen."
Officials in charge now say they will maintain a disciplined budget, although no revisions are being considered.
"The first quarter of the year is just coming to an end so it's too early to speak of any revisions," said Jacek Krzyslak, head of the Finance Ministry's (http://www.mofnet.gov.pl/) statistics department. Revenues are not keeping pace with expenditures but income is expected to pick up during the second half of the year, he said.
In addition to budgetary worries, the RPP pointed to potential inflationary strains from World War II forced labor compensation payments and agricultural markets. Economists noted that if the zloty weakens it is considered overvalued now that could also nudge inflation higher.
The second interest rate cut in two months still leaves Poland with some of the highest real interest rates in Europe. But the move worried some economists who think the RPP could be repeating the mistakes of 1998, when aggressive cuts fueled inflation months down the road.
"They tightened (monetary policy) too much before and they are easing too much now," said Erik Nielsen, a London-based economist with Goldman Sachs. "They are behind the curve."
Easing monetary policy now cannot alleviate this year's apparent economic slowdown, which was a concern of the interest-rate setting board, he said.
