MNI INTERVIEW: NBP Rate Cut Talk Premature - MPC's Tyrowicz
MNI (LONDON) - Poland is more than a year distant from price stability, with growth in wages and in prices for goods and services, together with government borrowing, buoying inflation despite weak external demand, National Bank of Poland’s Monetary Policy Council Joanna Tyrowicz told MNI, adding that it was too soon to consider rate cuts.
“In terms of bringing prices back to target, the Polish economy is out of sync with the global trends by approximately six quarters,” Joanna Tyrowicz said in an interview after the NBP again decided to leave the reference rate at 5.75%, one year after rates were last lowered.
While Governor Adam Glapinski indicated that easing could begin in Q2 2025, Tyrowicz said that although incoming data may change she saw no reason to consider interest rate cuts for a long time.
“Ultimately it doesn't matter what I think about the neutral rate, because the Polish economy will not be in equilibrium by the end of my term [in 2028],” she said. “Hopefully we will be closer to the inflation target, but the developments in the labour market and on the fiscal side will not have faded.” (See MNI EM INTERVIEW: Poland Seeks More International Bond Buyers)
The timing of future rate cuts has not been discussed by the MPC, said Tyrowicz, a noted hawk, expressing concern that pre-committing to doing so - especially so close to next May’s presidential elections - could appear "chaotic" and undermine the credibility of the Bank.
"No internal forecast at the Bank hints that by late Q1 or early Q2 inflation will have been controlled. Or even that major uncertainties will have been resolved. The coincidence of dates for potential rate cuts given by the governor with the date of the upcoming presidential elections, especially after the misguided MPC decision from September 2023, may be understood by the market as encouragement to speculate about the size of moves in the interest rates,” she said. (See MNI EM INTERVIEW: NBP Should Hold Rates, Keep Out Of Politics)
WAGE GROWTH
Labour demand has levelled-off but is still not weak, while wage growth is twice the level expected in mid-2023, with no sign of declines in real wages to levels consistent with the Bank’s CPI target in either manufacturing or market services.
Other upside risks include food prices, the fading impact of energy cost changes, and post-flood reconstruction, said Tyrowicz, pointing to evidence that construction prices play an outsize role in determining household inflation expectations. (See MNI EM INTERVIEW: NBP Likely To Hold Rates In 2024 - Dabrowski)
“Food prices are worrying in both the global and the local context. In Poland the season was not particularly successful and the floods did not help,” she said.
“The fading impact of energy price rises on CPI is irrelevant compared to market service sector price increases, which are currently in the neighbourhood of 6% year-on-year, and are expected to accelerate to 7% in the coming months,” she said, adding that inflation expectations had yet to adjust downwards.
MORE FISCAL TRANSPARENCY
Tyrowicz welcomed the greater commitment to fiscal transparency demonstrated by the government’s decision to explicitly include previously out-of-budget expenses in its most recent funding calculations.
While a more pronounced budget deficit will push up prices, so far the transmission from transfers, public sector wages and other expenses has been surprisingly limited, she said, noting that growth of household consumption was disproportionately slower than incomes growth.
This year’s upside surprises to GDP growth have come primarily from services, Tyrowicz said.
“There is currently a series of minor downward revisions to the GDP forecasts, but this is after a major shift of all the revisions upwards since mid-2023. Growth has accelerated massively in 2023 and is expected to continue strong into 2024,” she said.
In contrast, manufacturing has been hit by a slower-than-expected recovery in Germany and some other EU trading partners, with rate cuts unlikely to improve matters.
“Even if exporters cut prices, it may be there simply isn’t the market. Polish interest rates cannot compensate for this slower pickup in demand. We have no evidence that firms are struggling to secure financing or that the price is prohibitive,” she said, adding that the NBP has a single mandate for price stability anyway.
“So we ought to primarily focus on bringing inflation down.