The recent rate hike by Poland’s Central Bank was hard to justify given a low global growth environment and Greece sliding into deeper economic waters, according to economists.
Poland raised rates to 4.75% on 9 May despite the global trend to weaker growth and lower monetary policy. The move came as the US considers a fresh round of quantitative easing (QE) and Europe keeps to very low rates, with lending to banks at 1% through the LTRO.
The IMF criticized the move in a statement on Wednesday. In a frank note, the Fund said that “given the economic slowdown, the projected drop in inflation and muted wage pressures, hikes in policy interest rates do not seem warranted”.
Piotr Kalisz, chief economist at Citibank Handlowy in Warsaw, echoed the Fund’s scepticism: “It is not something we thought makes sense in the current environment given the slowdown and easing in inflation.”
Inflation fell 10 basis points (0.1 percentage points) in February. Kalisz said inflationary pressures had not translated into higher wages in the country. Not only that, he said the long-term inflation tendencies in the country were benign. He said he expected the Polish currency was likely to start to appreciate, probably at the end of this year or early next year.
Kalisz now sees the policy tightening cycle stopping in its tracks. “We don’t expect more hikes although there may be talk about further increases in June and July with risk of price hikes thanks to the 2012 Euro Championships,” he said.
“But we think there is no reason to hike rates then as these tendencies will be reversed once the games are over.
Agata Urbanska, central and eastern Europe economist at HSBC Bank in London, said the timing of the rate hike was puzzling. “We’re talking more about risks today. Banks are operating in a heightened risk environment.”
She said that if Greece were to leave the euro, a rash of rate cuts through the region was likely, noting that the Lehman Brothers bankruptcy in 2008 caused just such increases.
However, she said the Polish Bank had at least prepared the markets by signalling its intention before the decision was taken. Central Bank governor Marek Belka has vigorously defended the rate increase, dubbing it a “return to normal” and arguing that inflation, which has been running at around 4%, has proven surprisingly resistant and stubborn.
Peter Attard Montalto, director at Nomura International in London, was more supportive of the Polish Central Bank’s stance. He said forecasts for GDP were stronger next year and that there is a significant time lag between the implementation of monetary policy and its effects. He forecasts GDP growth of 3% this year and 3.4% for next year.
Montalto, who correctly predicted the latest rate hike, continued to be hawkish, predicting the Bank would raise rates another 25 basis points in July. “There is asymmetry in the policy making process. The hawks on Polish monetary policy have noted the stickiness of consumer price inflation. Even in the event of a deepening crisis, the zloty is likely to fall, leading to higher inflation.”