Poland’s central bank is expected to cut interest rates in spite of double digit inflation, raising concerns that rate decisions are partly being driven by politics in a crucial election year.
Warsaw was among the first central banks to raise interest rates in the autumn of 2021 and it is now set to lead the way in cutting them, despite inflation remaining far above the EU average.
Economists expect the move by the National Bank of Poland’s monetary policy council to come as early as this week, lowering borrowing rates from 6.75 per cent.
Some analysts claim the close relationship between the central bank’s president Adam Glapiński and the ruling conservative Law and Justice (PiS) party is skewing the central bank’s monetary policy, with PiS’s bid to win re-election in mid-October playing an outsized role in the decision.
“Glapiński wants to give a sign to the population that everything is under control, which it is not,” said Paweł Wojciechowski, a former finance minister who now chairs the Institute of Public Finance, a Warsaw think-tank. Instead “we should continue the cautious and conservative approach of not lowering interest rates”.
Jakub Borowski, Poland chief economist at Crédit Agricole, said Glapiński’s recent rhetoric meant that a pre-election rate cut was now “very likely” although “not justified”.
“His statements have suggested that there are other supreme targets for monetary policy than low and stable inflation,” Borowski added.
While the central bank targets inflation of 2.5 per cent, prices rose 10.1 per cent in the year to August.
Polish inflation has fallen steeply in recent months, but economists are concerned that core price pressures — which discount for changes in volatile items such as food and energy and are seen as a better gauge of underlying inflation — remain strong.
The data for August showed Poland still faced “challenging inflation dynamics and we think that there are risks that underlying inflation will prove sticky”, Goldman Sachs said in a research note.
But Glapiński indicated in July that 10 per cent could be used as a new threshold to cut rates again. “If inflation in September is in single digits and the forecasts show inflation declines in the coming quarters and years, an interest rate cut in September is possible,” he said.
To keep the central bank as independent as possible of politics, Polish law requires rates to be set by the central bank’s president alongside nine members of a monetary council. Appointments to the council are split between Poland’s president and the two chambers of parliament.
But with PiS in power since 2015 and Polish politics deeply polarised, the rate-setters are now divided into two uneven camps. Only the upper chamber, the senate, is controlled by the opposition led by former prime minister Donald Tusk.
Internal tensions were underlined in October when Glapiński and four other council members issued a statement expressing “extreme disapproval” at what they called “unacceptable violations” of the council’s rules by some of their colleagues.
They accused them of having incompatible side activities, as well as commenting on some decisions in breach of the council’s confidentiality rules. The statement did not name the accused, but analysts said they were clearly among the senate appointees, whose approach to monetary policy has also differed.
“In terms of political motivation, it’s hard not to notice that council members chosen by the opposition are substantially less dovish,” said ING bank economist Piotr Popławski.
A litmus test for whether politics are driving monetary policy will be whether or not the inclination to cut rates “evaporates if the elections bring a change in the government”, said Piotr Bielski, economist at Santander Poland.
Glapiński, 73, commands the support of the majority of council members. His personal relationship with PiS leader Jarosław Kaczyński dates back to the 1990s when Kaczyński founded his own party.
Adam Bodnar, Poland’s former ombudsman who is now an opposition candidate in October’s parliamentary election, has argued that Glapiński had become “something like a loyal servant” to the PiS leader.
Kaczyński’s twin brother, Lech, nominated Glapiński to the monetary council when he was Poland’s president in 2010, just before he died in a plane crash. Glapiński was made governor of the central bank in 2016, shortly after PiS returned to power, and was reappointed to a second term of six years in 2022.
“The idea of lowering interest rates will certainly be welcomed by companies, it will bring financial relief to entrepreneurs,” said Cezary Kaźmierczak, president of the Polish Union of Entrepreneurs and Employers. “Of course, it depends on the speed and scale of these reductions. If it were up to me, I’d do it carefully.”
The National Bank of Poland did not respond to a request for comment.
Additional reporting by Barbara Erling in Warsaw
Source: Economy - ft.com
