MNI INTERVIEW: NBP Rate Hold "Short-Sighted" - Ex-Governor

The National Bank of Poland should raise interest rates, with inflation expected to be volatile in coming months due to loose monetary and fiscal policy, former NBP chair Leszek Balcerowicz told MNI.

“Of course inflation in Poland is lower than it used to be, but the job is not finished,” said Balcerowicz, NBP head from 2001-7 and a former finance minister and deputy prime minister. (see MNI INTERVIEW: Polish CenBank Ignores Core Data-MPC's TyrowiczTyrowicz)

“It would be advisable to increase interest rates. The forecasts according to which inflation in Poland will decline are fragile. And in the longer run the risks to economic growth of excessively loose monetary policy are greater.”

Poland’s central bank opted to leave its reference rate unchanged at 5.75% for a fifth successive month in March, despite CPI inflation at 3.9% and core at 6.1% in January. Staff projections showed inflation of 2.8-4.3% in 2024, 2.2%-5.0% in 2025 and 1.5-4.3% in 2026, against the central bank’s medium-term target of 2.5% +/- 1%. (See MNI NBP WATCH: Rates Held Despite High Core, Better Growth)

The growth outlook was also found to have improved, though Balcerowicz said the Monetary Policy Council “should adopt a more rigorous approach, because when they refer to economic growth they are referring to short-term growth. They are just short-sighted.”

In the longer-term, Poland will need supply-side reform, privatisation and reduced dependency on the state sector if it is to return to stronger growth, he said.

“Compared to other European countries, Poland’s economic growth in recent years has been quite okay. But I would also emphasise that there are time lags in the economic policies of the last eight years. We have had a respectable rate of economic growth with bad policies,” he said.

"There have been some compensating factors, such as the inflows of Ukrainians, who according to some calculations contributed to raising Poland’s GDP by around 5%. But the bad policies have not disappeared, and without fixing them the economy will slow down.”

EU FUNDS

Balcerowicz welcomed many of the changes seen since the October accession of Poland’s new government under Donald Tusk, in particular those relating to the rule of law and public media.

February’s European Commission decision to allow Poland to access EUR137 billion in EU funds following rule of law reforms is also to be welcomed, he added, “but they cannot fully compensate for the shortcomings and weaknesses of economic policies.”

But there has not been a similar change in economic policies, with the spending programmes of both sides in last year’s elections looking very similar, Balcerowicz, now chair of Warsaw’s FOR think-tank, said.

“It was rather a competition to see who could give more. And if you have populism on both sides of the political spectrum this can be dangerous,” he said, citing “excessive” spending on education, social spending, pensions and the lowering of the retirement age.

“I would expect inflation to be volatile in the months ahead because of the fragility of the monetary policy approach that has been adopted - the fact that the current level of interest rates is not sufficient - but also because there is uncertainty on the fiscal side, which is not disciplined enough.”

Asked about the future of the current NBP Governor Adam Glapinski, who may be asked to appear before a state tribunal later this month amid allegations of misuse of office, Balcerowicz - a long-standing critic - said he would nevertheless be “extremely cautious” in trying to have him dismissed.

“It would set a dangerous precedent. Any accusations have to be bullet-proof.”