Poland has a lesson for central banks

Simply holding still shows backbone when other Polish institutions are under siege.
By sticking with its longest policy pause in almost two decades, the National Bank of Poland is winning over the biggest doubters of the country’s course after the Law & Justice party’s sweep into power last year. S&P Global Ratings, which in January handed the sovereign its first-ever downgrade, relented last week, improving the outlook on Polish government debt to stable in a sign central bank independence is no longer in question under new Governor Adam Glapinski.
“There is a great degree of market trust in Glapinski’s ability to find a cooperative but independent path,” said Peter Attard Montalto, a London-based economist at Nomura International Plc. “It’s fair to say the situation has turned out much better than the market had expected earlier in the year.”
Stacked with appointees of Law & Justice and led since June by a governor closely linked to the ruling party, the central bank has nonetheless clung to the policy of stable interest rates, unruffled by a record run of deflation and a deepening economic slowdown this year. The 10-member Monetary Policy Council will keep its benchmark at a historical low of 1.5 percent on Wednesday, according to all 34 analysts surveyed by Bloomberg. Glapinski and two other policy makers will comment on the decision at a news conference in Warsaw.

Under Pressure
Central bank independence has been called into question around the world as politicians look to assert greater sway over monetary policy and take a swipe at rate setters in countries from South Africa and the UK to Croatia and Turkey. The International Monetary Fund has warned that rising populism, coupled with a growing distrust for capitalism and protectionism, are some of the biggest threats facing the global economy.
In Poland, the central bank has steered clear of the biggest institutional crisis to grip the nation since the fall of communism, which has also pitted Law & Justice against the European Union and the US in a standoff over democratic standards. By focusing increasingly on financial stability, policy makers were able to sidestep a drumbeat toward monetary easing and some calls to print money for budget financing.
While Law & Justice leaders initially vowed to pick central bankers who’ll favor looser policy to spur economic growth, reduce unemployment and boost wages, Glapinski countered that the stability of the financial system may become “more important” than interest rates in two to three years. With monetary policy on pause since easing ended in March 2015, the governor has already signaled that the next move in borrowing costs will be up, possibly in early 2018.

‘Hawkish Line’
“We were certainly concerned about the threat to the Polish central bank’s independence,” said William Jackson, a senior emerging-markets analyst at Capital Economics in London. “But actually the new MPC showed significant continuity in its behaviour compared with the previous council. And it has pursued a more hawkish line in its press conferences than we had anticipated.”
Still, Polish assets have suffered since S&P’s downgrade, which cited concern new government policies were eroding the independence of key institutions, including the constitutional court and public media. The zloty is the second-worst performer this year in developing Europe with a drop of 3.7 percent against the euro.
Sitting out the challenges facing Poland will only get harder for the central bank. Price pressures are on the rise as the nation emerges from the EU’s second-longest after Greece after 28 months. At the same time, growth in gross domestic product last quarter slowed below 3 percent for the first time since 2013.
“In the coming months, the council will be in a more difficult situation due to the problem of growing inflation starting from January 2017 and low investment growth,” said Jaroslaw Janecki, chief economist at Societe Generale SA in Warsaw. “There will probably be a discussion about monetary policy tightening and the reaction of the MPC is uncertain. We will see to which extent the council will focus more on price stabilization than on GDP growth.” — Bloomberg