RPP turns heads with little expected rate hike
Poland's Monetary Policy Council (RPP) left more than a few economists and market watchers eating their predictions Wednesday when it raised all interest rates by a hundred basis points, or one percentage point.
Citing a negative price-growth trend that has continued since September 1999, as well as January's year-on-year inflation of 10.1%, the RPP took decisive action hiking the intervention, discount and Lombard rates to 17.5, 20 and 21.5%, respectively.
"I think it's basically the right thing to do. It increases the credibility of the central bank," said Pierre Bergeron, head of economic and financial research at Citibank (Poland). Bergeron personally had predicted the rate increase, although Citibank had been saying earlier Wednesday that there was only a 25% chance the central bank would act.
The RPP is taking aim at inflation in an attempt to meet its December year-on-year inflation target of 5.4-6.8%. The central bank also wanted to slow domestic demand and "contain" the current account deficit, Bergeron said. More than anything, though, he said the council wanted to make a point.
"The interesting story is the fact that all the rates were raised and raised by the same amount ... One of the intentions of the council was to send a message," he said, that it's "determined absolutely determined to achieve its inflation goals."
Marcin Mroz, an economist with brokerage house Wood & Co., said he also felt the RPP was sending a "warning signal." But he said he wasn't so sure about the justification behind the council's move.
"In spite of high interest rates, inflation will run in double digits in coming months," he said, adding that 100 basis points is "nothing substantial."
The two driving factors as far as inflation is concerned are food prices and regulated prices for services, both of which will continue to be in demand and fuel inflation, he said.
Mroz said he believed, however, as do most economy watchers at this point, that the deepening account deficit is a more serious problem than current inflation levels. One danger when increasing interest rates, he said, is that the move in turn tends to yield a stronger zloty.
A strong zloty, though favorable in some regards, adds to the purchasing power of the Polish consumer. In addition, because domestic companies are unable to meet demand and provide the high-tech products consumers are hungry for, the account deficit continues to grow. The current account is the difference between the inflow and outflow of goods and services through exports and imports.
"I think that imports may be higher than was previously expected," Mroz said, referring to ongoing speculation as to how January's account deficit data will look when it is released in early March. He estimated the current account deficit now totals more than $1.25 billion.
The current account gap expanded from 4.3% of GDP in 1998 to 7.6% in 1999. The widening gap will only be counterbalanced, Mroz said, when exports grow in relation to imports. This could happen over time, he said, through government-bred structural changes to the export system.
But he and other analysts, recognizing that higher interest rates also tend to decrease economic growth, said the RPP likely raised rates in an effort to cool consumer demand and therefore hopefully curb the current account deficit.
"This has to stop rising," Citibank's Bergeron said. "That's an issue for the authorities."
Citibank is not revising its forecast for 2000 GDP growth, Bergeron said. The bank expects GDP growth to come in at 4.7%.
As for inflation, Wood & Co.'s Mroz said he is expecting 7.5-8% for year-on-year in December 2000.
While inflation should begin to fall in the late second quarter, Mroz said that investors should not be surprised if the RPP hikes rates yet again if inflation does not look to be under control.
After the RPP hiked rates Wednesday, Hanna Gronkiewicz-Waltz, president of the National Bank of Poland (NBP), said that inflation expectations are quickly outpacing the government's target. "The council will be ready to again tighten monetary policy to implement the adopted target," Reuters news agency reported her saying.
A weakened zloty, a surge in oil prices and government meddling in food prices sent year-on-year inflation in December 1999 to 9.8%, leagues above that year's target of 6-6.7%.
The most recent figure of 10.1% year-on-year inflation for January 2000, came in below expectations, but was likewise the first double-digit inflation seen since September 1998.
