Poland shouldn’t rush to lower borrowing costs as the country needs to maintain positive real interest rates to boost banking deposits and protect the zloty from slippage, Andrzej Kazmierczak, a member of the Monetary Policy Council, said in an interview in Warsaw yesterday.
On why Poland needs positive real interest rates:
“Monetary policy has to assume that the euro area’s banking crisis will deepen and spread, and that Polish banks will feel the pinch. Lenders will have to attract deposits on the domestic market, which requires maintaining positive real interest rates. Poland’s banking industry is very exposed to external capital flows and the country is relatively under- banked.
‘‘That’s why the stability of the banking system and the exchange rate have to concern us more than would be the case at the major global central banks. One can’t be certain that portfolio investors will remain eager to buy Polish bonds and that the speculative inflows we’re now observing will continue.
‘‘Therefore, we have to mind the stability of the financial system and reinforce investor confidence. We also need to make sure that Polish households retain confidence in domestic banks.
‘‘Foreign investors worry about zloty depreciation. Positive real interest rates are essential to defend the zloty.
‘‘These are all heavyweight arguments. We need to stay calm and realistic when considering rate cuts. We can’t start easing just because have a lower inflation forecast on paper. The slowdown in price growth has to happen.
‘‘Another rate increase will be essential if inflation stays at 4 percent or higher after the third quarter. If the inflation rate actually begins a sustained decline and the euro area doesn’t tip into an even deeper crisis, then a rate decrease could be considered, but no earlier than the beginning of next year.
‘‘My preference is for a cautious approach that would allow for a wait-and-see phase to check whether inflation slows to less than 4 percent after the third quarter, see how much the economy slows and assess the impact of the euro area’s debt crisis on our condition.’’
On the main risks:
‘‘A particular concern is the forecast acceleration of price growth in the third quarter. We can’t predict the impact of such elevated readings on the inflation trajectory farther out. Right now we’re prepared for 4 percent inflation in September, and one of our forecasts predicts this level could persist until October. While falling energy prices have helped curb inflation, we have to take the recent rise in global food prices into account.
‘‘Since we don’t know the consequences of elevated inflation persisting in coming months, the Monetary Policy Council should refrain from reducing interest rates. A rate cut at this stage would be rash.
‘‘While the economic slowdown in Poland and a possible weakening of price growth would support a rate cut, we have to keep in mind the main risk factor. Monetary policy can’t be conducted in isolation from the financial system. In just three quarters, from the third quarter of 2011 through the first quarter of this year, more than 6 billion euros flowed out of Polish banks to foreign parents. This means the process of draining capital deposited in the Polish banking system has begun. Given the dire situation of euro area lenders, this process will not only continue but will have an increasingly negative impact on Poland’s banks.’’
On interpreting the May rate increase:
‘‘The May rate increase was intended to signal the MPC’s determination to fight inflation. We realized that a one-off rate increase would send this message while having a neutral effect on the economy. Any real impact would require a series of rate increases. Even with elevated inflation, we decided to stop at one increase because we could observe the symptoms of an economic slowdown. We also moderated our rhetoric, even though a persistent inflation rate of 4 percent means that we’re keeping a restrictive policy stance.’’
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