Poland Should Bring Key Rate to 1.5% Soon, Central Banker Says

(Bloomberg) --

Polish central bankers would like their key interest rate to quickly return to the pre-pandemic level of 1.5% but may need to hike further if inflation remains elevated, according to rate setter Jerzy Zyzynski.

The benchmark is now at 1.25% and investors are looking for clues regarding the scale of tightening at the Monetary Policy Council’s Dec. 8 meeting. Zyzynski said that the central bank will abandon “emergency monetary tools” as the economy recovers following the coronavirus pandemic.

“The economy’s path to normal appears secure,” he said in an interview last week. For now, “that also sets our target for the main rate at 1.5%, a level that served our economy really well for several years.”

Nevertheless, if inflation increases more than forecast, Poland may need to raise rates by a further 75 basis points from the current level, said Zyzynski. The 10-member MPC discussed a 100 basis-point increase last week but some members balked at making such a large move at once, he added. 

Last week’s rate increase by a larger-than-expected 0.75 percentage point followed the surprise October reversal of Poland’s wait-and-see approach which, combined with the unprecedented purchase of government bonds, helped shield the economy from the impact of the Covid pandemic.

The central bank’s new forecast projects the economy will expand by almost 5% through 2023. A recently approved tax revamp may have a pro-inflationary impact, according to Governor Adam Glapinski.

Policy maker Grazyna Ancyparowicz said last week that the tax cut and other stimulus measures are coming at “a very unfortunate moment,” as inflation hit a new two-decade high of 6.8% last month. 

The central bank’s latest projections show that inflation could grow between 5.1% and 6.5% next year after peaking at or just above 7% in January. More action may be needed if price growth exceeds the forecast, Zyzynski said.

In such a scenario, “there will be a need to raise the rate another 75 basis points from the current level,” he said. “Certainly, the implementation of the assumed inflation path next year requires vigilance and full readiness to make decisions.”

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