MNI INTERVIEW: Polish CenBank Ignores Core Data-MPC's Tyrowicz

The National Bank of Poland’s decision to hold key interest rates at a time when core inflation is at 6% means overall inflation will end the year well above the 2.5% target, a member of the bank’s Monetary Policy Council told MNI.

A majority of council members this month voted to keep the key reference rate unchanged, for a fourth meeting in a row, at 5.75%, as flash estimates suggested CPI inflation dropped from 6.2% in December to 3.9% in January.

However Joanna Tyrowicz, an MPC member since September 2022, warned that policymakers are paying insufficient attention to underlying inflation trends and focussing instead on unreliable metrics and the transitory effects of fiscal policy.

Speaking less than two weeks before the March policy meeting, Tyrowicz said in an interview that she was "voting for a level of interest rates that I am convinced will bring inflation down to target. This level in my estimation is 7.75%."

NEAR-TERM MEASURES

Tyrowicz said she was not surprised by the sub-4% headline inflation reading, though she questioned the usefulness of a measure that is prone to reflect mechanical, near-term responses to regulatory changes to food and energy prices in particular, rather than longer-term trends and the effects of likely policy reversals.

“My own view is that food VAT at 5% is the baseline, and its reduction is transitory,” Tyrowicz said. “We should not have been complacent at lower inflation rates due to transitory tax reductions. Likewise, higher energy prices were already approved by the regulatory authorities, so this is the baseline. Any reductions are transitory. Responsible monetary policy cares about permanent trends, not transitory deviations.”

Core inflation - currently in excess of 6% - will decline only “sluggishly” this year, she said. “We're going to end 2024 with core inflation still well above our target. Core inflation is nowhere near sufficiently moderated to substantiate any changes in the monetary policy stance.”

Seasonal repricing was lower than expected, but Tyrowicz cautioned against placing too much weight on one month’s data, with the effects of further regulatory changes – including minimum pay and public-sector wage hikes, child benefit increases and pension improvements - not becoming fully visible until the spring.

Part of this additional income will go to households with a high propensity to consume, though the overall effect could be limited by the desire to rebuild savings, which have declined in real terms during the past two years.

“Clearly the pass-through from income to consumption is not going to be 100%, there will be some attenuation. The more attenuation we see, the easier it will be for core CPI to subside,” she said, “However, to me this is merely a potential tail wind. At this point incomes rise fast and thus there is no reason to ease monetary policy.”

Still, lower headline CPI might also be used by employers to moderate pay settlements.

“This would be helpful for monetary policy,” she said. “However, firms have had wonderful financial results in 2023, so they could decide to accommodate at least some wage claims. I do not think we are going to fully grasp the effects of minimum wage hikes and wage increases in the public sector before the middle of April.”

GOVERNOR GLAPINSKI

NBP governor Adam Glapinski has come under close scrutiny since the election of a coalition government led by Donald Tusk last year. There have since been suggestions Glapinski - seen by some as sympathetic to the ousted Law and Justice party - could be removed from his position, though the process is not straightforward.

Tyrowicz, who has publicly questioned Glapinski’s qualifications for his role, said that under his leadership the MPC has failed to base decision-making on incoming economic data, leaving it “without a reaction function.”

“Public comments tend to focus particularly on the fiscal side, which I find inappropriate given that our job is far from complete,” she said. “We have had pro-inflationary fiscal policy and monetary policy should adequately accommodate this circumstance irrespective of the parties in government.”