RPP expected to cut interest rates

The Monetary Policy Council (RPP) is expected to further attempt to stimulate the economy by cutting interest rates this week, despite a litany of positive economic data for July indicating that an economic reco-very is here or on the horizon. Economists expect the 10-member RPP, which holds a monthly rate-setting meeting this week, to cut the current key interest rate of 8.5% by 50 basis points, continuing its small-steps approach to rate-lowering that has been praised by some economists, but derided by the government. Despite the expected cut, the main economic indicators have revealed signs of economic revitalization in July, as industrial production rose 2.9%, real wages were up 2.8%, and Poland's trade deficit fell. "I believe the (RPP) will cut (the main interest rate) by 50 basis points," said Marcin Mróz, a senior economist at SG Bank. "One percent would be too big of an adjustment. It prefers gradual adjustments, and 25% would be insignificant in this market." But he added that the RPP's decision would be more complicated than in recent months since some have been quick to hail an economic recovery for Poland given the somewhat rosy indicators. The RPP needs to balance this optimism with its existing measured strategy to rate cuts, Mróz said.

"Definitely we are at the brink of reco-very, the beginning of improvement," he said. "But you don't know the timing. It could be many months." Other economists agreed that one month of good fortune does not translate into a full economic rally, and they urged the RPP not to change its strategy that has more than halved interest rates in the past 18 months, most by monthly 50 basis-point decreases. "We think that at the present stage (another cut) is a good move," said Piotr Bielski, an economist at Bank Zachodni WBK. Even with the good news about higher consumer confidence and industrial output, for instance, Poland's unemployment rate remains high. The country's jobless rate rose to 17.4% last month from 17.3%, and many expect the trend to continue. "The situation is still uncertain for unemployment," Mróz said. "And recent reports imply further layoffs." While economists are cheering the RPP's expected cutting of the key interest rate this week, they also said they favored the body's decision last month to leave it unchanged amid a surprising reshuffle in Prime Minister Leszek Miller's cabinet and the appointment of Finance Minister Grzegorz Kołodko. "At the last meeting the situation was completely different," Mróz said. "The wait-and-see strategy was correct." Bielski agreed. "The last meeting was special because (just prior to it) they had many changes in government," he said. "The market was nervous. No one knew what to expect from the finance minister."