Poland's Pre-Election Splurge Revives Talk of Rate Hike for 2020

(Bloomberg) -- Poland’s spending splurge before this year’s general election has failed to dent the central bank’s resolve to keep borrowing costs at a record low. Beyond 2019, however, standing pat will become trickier, according to a member of the bank’s interest-rate-setting panel.

Wobbling in the polls, the government is splashing 40 billion zloty ($10.5 billion) on tax cuts and extra social benefits, though for now the inflationary effect will be cushioned by a freeze on regulated energy prices. Lukasz Hardt, seen as part of a hawkish minority on the Monetary Policy Council, says the “full impact” of the stimulus will be felt next year.

“2020 is a different story,” he said in an interview in Warsaw. “Such a strong fiscal intervention marks the moment from which inflation behavior needs to be watched even more vigilantly than it has been so far.”

Talk of a rate hike in the European Union’s largest eastern economy had been quashed by slower euro-area growth and a more dovish approach from the world’s major central banks. Polish Governor Adam Glapinski advocates for stable borrowing costs through 2022 and says the fiscal package won’t change the rate path. But even after a downward revision, the bank forecasts inflation exceeding its goal for the first time in seven years in 2020.

The combination of the government’s pre-election expenditure and stimulus by other central banks make Hardt think next year’s projection may be too conservative.

“It already shows inflation above the target and I wouldn’t be surprised if it was somehow higher,” he said. “Taking that into consideration, it’s difficult for me to exclude the necessity of embarking on monetary-policy tightening next year.”

Besides stimulus, Hardt points to other inflationary factors that are likely to kick in soon:

  • Wage gains outpacing productivity for an unprecedentedly long period
  • The temptation -- and ability -- of globally integrated Polish manufacturers to raise prices because of fallout from the trade war
  • Slower expansion by supermarket chains, meaning less price competition

Last month, before the government’s announcement on social spending, Poland’s MPC hawks said the likelihood of a rate increase had fallen significantly. Hardt, who sees the package preventing economic expansion from dipping below 4 percent, has another view now.

“I’d disagree with that statement today,” Hardt said. “It seems to me that due to this large fiscal stimulus, even if the risks are still balanced, we have a slightly greater probability of higher inflation.”

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