RPP surprises all by hiking key rate to cool borrowing
To emphasize its point, the council on Wednesday boosted the intervention rate by 1% to 14%. This marked the first time in two years that the RPP or the National Bank of Poland (NBP), which previously had control over interest-rate policy, had tightened rates.
The move was unexpected by markets, which did not expect to see any movement on rates until later in the year.
Analysts said that while the increase in the intervention rate, which is the lowest rate the central bank will pay for 28-day deposits and directly influences the inter-bank market, is symbolic, it also is a clear warning signal.
"If the credit activity doesn't slow down, we can expect another rate increase by the end of the year," said Marcin Mroz, an economist with Wood & Co.
NBP President Hanna Gronkiewicz-Waltz singled out consumer borrowing after the RPP meeting as one of the council's main inflationary worries. This is especially ominous because it was this same problem that led the NBP in 1997 to embark on a nearly one-year period of tightening.
At the end of August, consumer credits increased by 44.5%, compared to 34.4% growth a year ago and 27.7% average growth in 1998.
"The RPP wanted to send a strong signal to consumers," said Krzysztof Rybinski, chief economist with ING Barings, "that interest rates do not only go down, but also up."
He added that consumer-credit growth is especially worrying when combined with the widening current account deficit. In July, the current account deficit was $1.02 billion, bringing the total accumulated 1999 deficit to $6.7 billion, or 6.7% of gross domestic product (GDP).
In addition, not only have export sales dropped more than twice the amount that imports have fallen, but the structure of imports has changed, Rybinski said. In 1999, imports of consumer goods accounted for up to 21% of all imports, he said, compared to about 18% last year. This has added fuel to the current account deficit's fire.
But economists worry that the RPP's move may be heard by the markets, possibly the government and not by consumers.
"The question is whether consumers will be able to read the signal," Rybinski said. "Not necessarily."
Another question is whether banks will bend to the central bank's will, added Jaroslaw Malkowski, deputy president with LG Petrobank. He said he doubts it.
Malkowski said banks are likely to balk at increasing rates because of intense competition on the retail banking market.
"Unless the largest retail banks do that, nobody will want to lose the customers," he said.
If banks don't follow the RPP's line, the increase in the intervention rate is only likely to influence corporate lending, Rybinski added. That's because the intervention rate only translates directly to the inter-bank market. If it's going to increase credit costs, it will be for corporate customers whose credit rates are based on WIBOR (Warsaw Interbank Offered Rate) which is influenced by the intervention rate, he added.
But consumers weren't the RPP's only target. With the Sejm set next month to take up the 2000 budget, the council also wanted to reinforce the need for fiscal discipline.
"The move is a pre-emptive strike against any risk of rising inflation next year," Citibank (Poland) said in its weekly report. "It's also a signal for the government that the RPP is prepared to tighten monetary conditions, if it feels that fiscal policy is not restrictive enough."
In the government's draft budget, which is supposed to be sent to the Parliament by Oct. 1, the budget deficit is set at zl. 12.7 billion ($3.17 billion), or 1.87% of GDP. This compares to a 1999 target budget deficit of 2.15% of GDP. Although the Sejm must work within the deficit target, there is always a danger of slippage due to political infighting.
"On this aspect, the message to the government is a strong one," the Citibank report added.
The RPP started getting inflationary jitters when after the further deterioration in the current account, inflation in August surprisingly rose by 0.6% from July, brining year-on-year inflation to 7.2%.
"It's coming close to this year's inflation target of 7.8%," said Mariusz Pypec, an analyst with CAIB Securities. In addition, after the first 15 days of September food prices had already increased by 2.3%, he said.
"Thus, we can expect 7.4% year-on-year inflation already in September," Pypec said.
This would still be within the RPP's end-of-year inflation target of 6.2-7.8%. But if price growth is at the higher end of this range, it would make achieving next year's goals that much more difficult.
At its meeting last week, the RPP set new inflation goals for next year, a range of 5.4-6.8%.
In addition, driving inflation down remains the RPP's main macro-economic goal and other conditions are not setting off similar alarm bells. Real GDP growth in the second quarter was 3%, up from 1.5% growth during the first quarter, and industrial output increased in August by 4.9% after a 2% fall in July.
The RPP's decision to hike the intervention rate was the first rate increase since August 1997 when the NBP upped the Lombard rate from 25% to 27% and the discount rate from 22% to 24.5%. The tight money policy continued until April 1998, when the central bank cut the intervention rate by one point to 23%. This was followed by a gradual loosening as inflation started to fall until the largest reduction in January this year when the Lombard rate fell to 17% and the discount rate went down to 15.5%.
The move was unexpected by markets, which did not expect to see any movement on rates until later in the year.
Analysts said that while the increase in the intervention rate, which is the lowest rate the central bank will pay for 28-day deposits and directly influences the inter-bank market, is symbolic, it also is a clear warning signal.
"If the credit activity doesn't slow down, we can expect another rate increase by the end of the year," said Marcin Mroz, an economist with Wood & Co.
NBP President Hanna Gronkiewicz-Waltz singled out consumer borrowing after the RPP meeting as one of the council's main inflationary worries. This is especially ominous because it was this same problem that led the NBP in 1997 to embark on a nearly one-year period of tightening.
At the end of August, consumer credits increased by 44.5%, compared to 34.4% growth a year ago and 27.7% average growth in 1998.
"The RPP wanted to send a strong signal to consumers," said Krzysztof Rybinski, chief economist with ING Barings, "that interest rates do not only go down, but also up."
He added that consumer-credit growth is especially worrying when combined with the widening current account deficit. In July, the current account deficit was $1.02 billion, bringing the total accumulated 1999 deficit to $6.7 billion, or 6.7% of gross domestic product (GDP).
In addition, not only have export sales dropped more than twice the amount that imports have fallen, but the structure of imports has changed, Rybinski said. In 1999, imports of consumer goods accounted for up to 21% of all imports, he said, compared to about 18% last year. This has added fuel to the current account deficit's fire.
But economists worry that the RPP's move may be heard by the markets, possibly the government and not by consumers.
"The question is whether consumers will be able to read the signal," Rybinski said. "Not necessarily."
Another question is whether banks will bend to the central bank's will, added Jaroslaw Malkowski, deputy president with LG Petrobank. He said he doubts it.
Malkowski said banks are likely to balk at increasing rates because of intense competition on the retail banking market.
"Unless the largest retail banks do that, nobody will want to lose the customers," he said.
If banks don't follow the RPP's line, the increase in the intervention rate is only likely to influence corporate lending, Rybinski added. That's because the intervention rate only translates directly to the inter-bank market. If it's going to increase credit costs, it will be for corporate customers whose credit rates are based on WIBOR (Warsaw Interbank Offered Rate) which is influenced by the intervention rate, he added.
But consumers weren't the RPP's only target. With the Sejm set next month to take up the 2000 budget, the council also wanted to reinforce the need for fiscal discipline.
"The move is a pre-emptive strike against any risk of rising inflation next year," Citibank (Poland) said in its weekly report. "It's also a signal for the government that the RPP is prepared to tighten monetary conditions, if it feels that fiscal policy is not restrictive enough."
In the government's draft budget, which is supposed to be sent to the Parliament by Oct. 1, the budget deficit is set at zl. 12.7 billion ($3.17 billion), or 1.87% of GDP. This compares to a 1999 target budget deficit of 2.15% of GDP. Although the Sejm must work within the deficit target, there is always a danger of slippage due to political infighting.
"On this aspect, the message to the government is a strong one," the Citibank report added.
The RPP started getting inflationary jitters when after the further deterioration in the current account, inflation in August surprisingly rose by 0.6% from July, brining year-on-year inflation to 7.2%.
"It's coming close to this year's inflation target of 7.8%," said Mariusz Pypec, an analyst with CAIB Securities. In addition, after the first 15 days of September food prices had already increased by 2.3%, he said.
"Thus, we can expect 7.4% year-on-year inflation already in September," Pypec said.
This would still be within the RPP's end-of-year inflation target of 6.2-7.8%. But if price growth is at the higher end of this range, it would make achieving next year's goals that much more difficult.
At its meeting last week, the RPP set new inflation goals for next year, a range of 5.4-6.8%.
In addition, driving inflation down remains the RPP's main macro-economic goal and other conditions are not setting off similar alarm bells. Real GDP growth in the second quarter was 3%, up from 1.5% growth during the first quarter, and industrial output increased in August by 4.9% after a 2% fall in July.
The RPP's decision to hike the intervention rate was the first rate increase since August 1997 when the NBP upped the Lombard rate from 25% to 27% and the discount rate from 22% to 24.5%. The tight money policy continued until April 1998, when the central bank cut the intervention rate by one point to 23%. This was followed by a gradual loosening as inflation started to fall until the largest reduction in January this year when the Lombard rate fell to 17% and the discount rate went down to 15.5%.
