RPP likely to resist pressure to cut rates this week
Mounting pressure on the Monetary Policy Council (RPP) is unlikely to force an interest rate cut this week, economists said, though failure to act could further electrify political rhetoric and set in motion changes to the body's mandate.
"If the NBP (National Bank of Poland) and the RPP are not willing to compromise, we are ready to change the Constitution," said Józef Gruszka, a Peasants Party (PSL) deputy and vice chairman of the Sejm's Public Finance Committee.
The PSL is the junior partner in the Democratic Left Alliance (SLD)-led government. Prime Minister Leszek Miller has also demanded lower rates.
The RPP this week is set to meet for the last time in 2001.
"For financial markets this meeting will be a non-event because nobody expects them to cut rates; however, for politicians it will be a very important event," said Krzysztof Rybiński, chief economist at Bank Zachodni WBK, noting that political leaders have called for a 150 basis-point rate reduction.
The 10-person body has lopped 7.5 percentage points off central bank interest rates with six cuts since Jan. 1. The NBP's main interest rate is now at 11.5%, the lowest level since before 1997, when its charter was amended and it was mandated with maintaining price stability. An SLD-PSL coalition was in power at that time, though Gruszka called the coalition's law a "mistake."
While historically low, real interest rates are still the highest among Poland's free-market neighbors. This year's cuts have come amid sharply falling inflation and deteriorating economic growth. The yearly inflation rate in October was 4.0% and the government is projecting 1.2% gross domestic product (GDP) growth this year.
But even in political circles, the RPP is not unanimously blamed for the slowing economy and the move for an altered mandate is not universally popular. The Sejm's biggest opposition party, the Civic Platform (PO), is opposed to the oft-discussed change.
"PO will be the last party to support limiting their rights," said Zyta Gilowska, a vice chairman of the Sejm's Public Finance Committee.
Rybiński said the political posturing surrounding the RPP is more a ploy to talk down the Polish currency than a threat to the central bank's independence.
"It's a tricky game," he said. "I don't think politicians want to really change the central bank charter, they want to devalue the złoty. They understand (that changing the charter) could harm prospects for joining the EU. They don't want that to happen."
A weaker złoty would offer a break to Polish exporters by making their products cheaper abroad, help budget revenues by making imports costlier and thus boosting value-added taxes, and could help stabilize the government coalition because, Rybiński said, a weaker currency has a similar effect to an import tax.
PSL has been pushing for the import tax during this budget debate but SLD has resisted, straining the coalition. The Sejm last week continued to debate difficult 2002 budget figures. Finance Minister Marek Belka's 2002 plan, which calls for 300 basis points in cuts during the next few months, is forcing tough decisions on the details of taxing and spending.
Belka's budget outlines call for a zł. 40 billion ($10 billion) budget deficit, about 5% of gross domestic product - a figure deputies cannot change. Budget revenues are set at zł. 143.9 billion ($35.9 billion) and spending at zł. 183.9 billion ($45.9 billion). Deputies have already OK'd some changes to personal income tax (PIT) laws that are expected to raise zł. 4.3 billion ($1.08 billion), but nixed a higher value-added tax (VAT) rate on construction services and materials.
Mieczysław Czerniawski, an SLD deputy and chairman of the Public Finance Committee, said his committee will present a final report by Jan. 31. The project is scheduled to be completed by March 15, well into the fiscal year. Deputies last week focused on budget accompanying laws, which will provide a true test of the political will to reform public finances, Rybiński said.
PSL's Gruszka said that the Public Finance committee is likely to find savings when looking at the budget numbers, but admitted that there is not yet a consensus on where to make necessary cuts.
"After the first reading one can see that both the coalition and the opposition would like to spend more than has been planned," Gruszka said.
Jeff Sparshott
