Cracks Appear in Poland's Resistance to Raising Interest Rates

(Bloomberg) -- Cracks are starting to show in Poland’s resolve to maintain record-low borrowing costs.

While central bank Governor Adam Glapinski has long foretold that interest rates would remain where they are for years to come, an $11 billion government spending package to win back voters before elections is causing concern.

The outlays look set to juice an economy that’s already expanding at a healthy 4 percent clip. That risks feeding through to inflation, which has so far been benign.

Cracks Appear in Poland's Resistance to Raising Interest Rates

Glapinski has played down the knock-on effects of the government’s splurge and points to weaker economies in the neighboring euro area as a reason to hold steady. But interviews with some his colleagues reveal that the traditional hawkish minority on the 10-member Monetary Policy Council is gaining support.

“It turns out the matter isn’t as clear-cut as Governor Glapinski has made out,” said Piotr Bielski, an economist at Santander Bank Polska. “It’s a long road from here to a rate hike, but it’s not the case that the fiscal package didn’t change the status quo.”

Eugeniusz Gatnar has been joined by fellow MPC members including Kamil Zubelewicz in broaching the topic of higher interest rates. Conversations during the past two weeks with three more rate-setters suggest half the panel may be of a similar mind, though Glapinski could cast a tie-breaking vote in the event of an even split.

Grazyna Ancyparowicz

“I’m no longer convinced we’d be able to guarantee the stability of rates in the face of such aggressive fiscal policy,” Ancyparowicz said this week in Warsaw.

Some elements of the stimulus -- such as expanding child benefits -- “will surely pay off in the future,” she said, putting the chance of interest rates staying at 1.5 percent next year at about two-thirds. “The package as a whole, however, is fiscal loosening, which risks turning into a flood of money.”

Jerzy Osiatynski

Inflation may quicken “significantly” because of the government’s fiscal stimulus, according to Osiatynski, who steps down this year.

“The fiscal package raises risk that inflation will accelerate faster than forecast,” he said. “That’s why it can no longer be assumed that interest rates will remain stable even until the end of this year.”

Lukasz Hardt

This year, the inflationary effect of the government’s additional expenditure will be cushioned by a freeze on regulated energy prices, according to Hardt. The “full impact” of the stimulus will be felt next year.

“2020 is a different story,” he told Bloomberg this month. “It’s difficult for me to exclude the necessity of embarking on monetary-policy tightening next year.”

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