Lonely job of fighting Polish inflation irks central banker

Bloomberg

Central banks did their best to fight deflation. Now a Polish policy maker wants his government to step up as prices are making a comeback.
As the National Bank of Poland comes under pressure to act in response to a rebound in price growth, Jerzy Osiatynski counters that it “has no monopoly on fighting inflation.” Higher wages raise the prospect that producers will look to increase their profit margins by keeping prices as high as the market can bear, according to Osiatynski.
“If anything like that happens, it should be up to the anti-monopoly agency to counteract such practices,” Osiatynski said. “If one wants to have lower inflation, the government should compromise with social partners on wage growth, and market regulators should defend competition as it’s socially less painful than monetary tightening.”
As an era of unprecedented stimulus winds down, central banks are increasingly urging governments to undertake structural reforms and use fiscal leeway to bolster growth. In Poland, where policy makers shouldered the burden of record-long deflation that ended in November, the central bank is also bumping up against the limits of what it can
accomplish in containing prices.
Osiatynski considers any inflationary pressure “doubtful” for the time being, meaning the government has time to mobilize its tools for keeping a lid on prices.
But after employment jumped at the fastest pace in almost a decade and wages increased, household incomes rose by an estimated 8 to 9 percent. Such a “strong” gain could put pressure on inflation, according to Osiatynski.
While policy makers already revised their forecasts for inflation to 2 percent this year and next, they still see it below their 2.5 percent goal in 2019. Driven by a global acceleration in food and fuel costs, the annual index in Poland jumped to a four-year high of 2.2 percent in February, soaring to within the central bank’s target range almost immediately after a period of deflation.
For Osiatynski, Scandinavian and German governments are examples to follow because they succeeded in the past by finding a social compromise in containing wages for the sake of price stability.
While he’s been calling on Poland’s cabinet to take some responsibility for the domestic factors behind inflation, the new ruling party has so far shown little concern for prices. It swept into power in 2015 on promises of boosting
welfare spending and protecting poorer voters.
Should the government act, it “would allow the central bank to continue supporting economic growth and employment by maintaining relatively low interest rates,” Osiatynski said.
Stable Rates
Based on minutes of the central bank’s March meeting, a majority assumes rates will be stable in the coming quarters because inflation isn’t at risk of exceeding the central bank’s 2.5 percent target through 2019. Poland’s benchmark has been on hold at a record low since easing ended in March 2015.
Even if inflation exceeds the target by 0.1-0.2 percentage point in the middle of 2017, it will slow to 1.6-1.7 percent by year-end, according to Osiatynski. The possibility that oil will slip in the near future will help keep inflation “just below” 2.5 percent in 2018.
“Dovish” central bank comments helped Polish 10-year bonds gains for a sixth day on Monday, the longest winning streak in more than a year, Miroslaw Budzicki and Arkadiusz Trzciolek, strategists at PKO Bank Polski SA, said in a research note on Monday.
The yield on the benchmark local-currency note dropped two basis points to 3.54 percent at 11:44 a.m. in Warsaw, some 20 basis points lower than on March 17. The zloty was little changed at 4.2650 against the euro.
Economists calling for the central bank to respond to the latest monthly inflation data with higher borrowing costs don’t recognize that price growth will probably moderate later this year, Osiatynski says.
“Overreacting to that data comes in the form of pressure on policy makers, who are urged to drop their bias and move to raising rates,” Osiatynski said. “Oil prices, however, have in the meantime stabilized and their impact on our inflation will fade away month after month. So far so good, but the future looks even better.”