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Poland's conservatives to put stamp on monetary policy, token rate cut possible
December 17, 2015 / 11:05 AM / 2 years ago

Poland's conservatives to put stamp on monetary policy, token rate cut possible

* Eight of 10 members of policy council to be replaced

* Ruling PiS party, its ally President Duda, to name them

* PiS called for rate cuts before election

* Space for easing limited due to banks, zloty

By Marcin Goettig and Pawel Sobczak

WARSAW, Dec 17 (Reuters) - Weeks after being elected on a promise to boost economic growth, Poland’s conservative rulers look set to use a reshuffle at the central bank to put their stamp on monetary policy and possibly trim interest rates.

The economically left-leaning but nationalist-minded Law and Justice (PiS), led by former prime minister Jaroslaw Kaczynski, has been tightening its grip on the economy since ousting the centrist Civic Platform in an election in October.

With the mandates of eight of the 10 members of the central bank’s Monetary Policy Council (MPC) ending early next year, PiS can gain an additional tool to shape policy by packing the rate-setting board with like-minded candidates.

That makes a token reduction in interest rates possible next year as PiS officials have signalled they may lower the cost of borrowing even though the main interest rate is already at a record low of 1.5 percent.

“The next MPC will quickly want to demonstrate that it has been elected on a different mandate than its predecessors,” said Anders Svendsen, an economist at Nordea Bank.

A Reuters poll of 21 economists conducted at the end of November suggested the central bank could cut the rate in the first quarter to as low as 1.25 percent.

A bigger cut is unlikely. Many economists question whether a rate cut would give a significant boost to economic expansion as the rate is already low, Poland has persistent deflation and growth is relatively high after hitting 3.5 percent in the third quarter compared to a year earlier.

Some economists also warn that, if implemented aggressively, a rate cut could do more harm than good by destabilising the zloty currency and hurting the banking sector, already at risk from a planned asset tax on banks.

PiS officials appear to have made their rhetoric of rate-cutting less aggressive since the Oct. 25 election, possibly hoping to calm financial markets which have priced in concerns over future economic policy plans.

The zloty hit 4.3720 zlotys per euro this week, its lowest level in 12 months, and the blue chip WIG20 index is trading at its lowest level since mid-2009.

Their comments may also be intended to address disquiet over how to preserve the central bank’s independence when one party so dominates politics in Poland, which is a member of the European Union and NATO but was under communist rule until 1989.

Henryk Kowalczyk, now a senior official in the prime minister’s office, told the state news agency PAP before the election that PiS would take into account a candidate’s propensity for monetary easing when nominating council members.

His comments drew criticism from three current central bankers who said the policies planned by PiS would undermine the central bank’s independence.

Such remarks echo the concerns voiced by other European countries and European institutions about the impact of populist Prime Minister Viktor Orban’s policies on Hungary’s central bank, though Orban went much further by changing central bank legislation and the people running the bank.


The MPC’s responsibilities, apart from setting base interest rates for the National Bank of Poland, include drawing up annual monetary policy guidelines used by the central bank board.

Members are appointed for six-year terms and, according to Polish law, cannot be dismissed unless they are convicted of a crime or violate a law requiring them to suspend their membership in political parties or unions during their tenure.

The process of appointing them involves both houses of parliament and the president. As President Andrzej Duda is a PiS ally and both chambers are controlled by PiS, the party is in a strong position to force through its chosen candidates.

Duda will also name a new central bank governor by the middle of next year and a source close to PiS said Kaczynski, the twin brother of late President Lech Kaczynski, or his closest advisors were likely to have the final say over the choice of candidates.

In the past no single party has had the chance to dominate the selection process so much and there have been big differences of opinion in the MPC.

No official candidates have been announced yet but Reuters spoke to several people identified by sources or local media as potentially in the running.

Sources close to PiS have said up to 20 names are being considered by party leaders to be appointed gradually in the first three months of 2016.

The council’s January rate meeting will be conducted in the current composition, but there will be five new policymakers at the February meeting and eight new ones in March.

One potential candidate for election to the MPC member, Jerzy Zyzynski, told Reuters this month that a rate cut of “at most 25 basis points” was possible.

He also said a rate increase by the U.S. Federal Reserve could complicate monetary easing by weakening the zloty, now near decade lows against the dollar.

“If the dollar is rising, then it would be hard to decide on lowering interest rates in Poland,” Zyzynski said. “This may cause an outflow of capital.”

A senior government source, who spoke on condition of anonymity, also spoke of a slight rate cut in Poland.

“We have to keep in mind the situation of banks. A small rate cut could be possible, but this is just a cosmetic measure,” the source said. “Massive rate cuts are ruled out.”

The government was not immediately available to comment.


The bank cut rates by half a percentage point in March to a record low of 1.5 percent and said its rate-cutting cycle was over after shaving a total of 325 basis points off credit costs since late 2012 to spur growth and inflation.

Another potential rate-setter, academic Grazyna Ancyparowicz, told Reuters that rate cuts would not lead to higher economic growth, an important justification for monetary easing cited by PiS politicians.

“A further lowering of interest rates will not remove the problems on the labour market or reduce the scale of the grey economy,” she said. “And these are the main barriers hindering development and reasons for the low pace of economic growth.”

Economists also question the wisdom of a cut.

“Rate cuts are not necessary in Poland, because the current level of rates is not a hindrance to economic growth,” said Piotr Kalisz, economist at Citigroup.

PiS officials have also said they wanted the central bank to introduce a cheap-lending programme, comparable to European Central Bank’s Long-term Refinancing Operation, and amounting to about $88 billion over six years.

The deputy prime minister responsible for economic issues, Mateusz Morawiecki, said in November a decision on whether and how to use a cheap-lending programme would be taken independently by the central bank. ($1 = 3.9604 zlotys)

Writing by Marcin Goettig, Editing by Timothy Heritage

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