Polish economy proves its resilience

A long expected move has just been made. After nineteen months of standing at 3.50% benchmark interest rate of Polish Central Bank was raised by 25 basis points. The decision taken by Monetary Policy Council was anticipated by financial markets.

Thus Poland joined the group of countries where monetary tightening has got under way. The prudent step confirms Polish economy is back on the growth track and in the middle term inflation poses a bigger threat to macroeconomic stability than low pace of GDP growth. Quite probably this year we will witness three interest rate hikes, each by 25 basis points, so at the end of the year the benchmark rate will reach 4.50%. This series of gentle increases will not hamper economic growth, but will ensure price stability (conducive and indispensable to sustain long-term growth) and will head off the risk of overheating the economy. In the long term I expect Polish central bank to focus mainly on inflation data; pace of economic growth will recede into background.

Markets have already discounted the hike. FRA quotations had indicated one hike in 2010, so according to the markets, the decision was belated. Valuations of bond funds and money market funds, both sensitive to interest rate movements (correlation is negative) were down in the recent weeks (bond funds), or levelled off (money market funds). What was felt by participants of "safe" investment funds will soon affect borrowers who have taken out variable-rate loans (that applies to mortgage loans denominated in PLN as well). Mortgage borrowers whose debts are denominated in foreign currencies can expect, holding everything else unchanged, slightly lower installments, as rising rates should cause zloty to appreciate. Interests paid by the banks for time deposits and saving accounts will pick up, but here you ought to expect a considerable lag - banks are not hard up for cash and will not pay over the odds for your savings.

Today WIG20, the main index of Warsaw Stock Exchange hit its many months' high and climbed to levels last seen in summer 2008 (and subsequently plummeted). In the short term I expect stock prices to go up, in the mid-term a correction by round about 10% would be quite natural, my target for the end of the year is 3,200 points (WIG 20). I will look back on these forecasts at the end of the year, to check how accurate they were.

In the meantime I took a glance at comment threads following the news items informing about the hike. Commentators either fulminate against prime minister Tusk and the ruling Platforma Obywatelska (as if they were responsible for the move) or blame conspiracy of foreing banks, all in league to fleece poor Poles... Thoughtless comments, which by the way are indispensable part of the Internet (educated people have little time to comment), remind me that Poles' grasp of mechanics of economics still needs to be worked on...

Should I be proud?

My school has announced on its website two professors from Warsaw School of Economics had been appointed as members of Monetary Policy Council. My university employs a lot of outstanding experts in monetary policy, like professor Krzysztof Rybiński, but for no apparent reason the current president decided to pick some of his buddies and once again set personal relationships above competencies. The previous president also for no apparent reasons designated renowned specialists – Andrzej Sławiński, Andrzej Wojtyna and Dariusz Filar.

Some time ago I evaluated competencies of Zyta Gilowska, there’s nothing I can add about her. None of fellow students with whom I discussed the nomination of Mr Glapiński and we our views simply square – he lacks knowledge, but is a close friend of Mr Kaczyński and no one else would have appointed him. He will have to learn a lot.

When it comes to Mr Kaźmierczak, the matter is a bit more complex. His field of academic research overlaps the issues of monetary policy, but there’s one significant fact about him that might have been seen as a merit by Mr Kaczyński. The new member of monetary authorities has never been a reputable figure among economists. His opinions are not appreciated, few people heard about him. He publishes in Gnash Dziennik, a newspaper of Father Rydzyk’s empire. I may be biased against him, as his dovish views are totally dissimilar to mine. He doesn’t see inflation above target as a danger for economy, it’s even conducive to economic growth as he says.

Inflation, contrary to what he advocates has to be handled carefully. It hazardously easily spirals out of control. As soon as it gets noticeable for customers, their inflationary expectations rise, so they hold out for pay rises and then when they get it, the economy is on the verge of a slippery slope.

In Poland a relatively tight monetary policy prior to the crisis helped our country avert a financial meltdown. Monetary authorities, mostly Mr Balcerowicz, who was a governor of central bank at the time were harshly criticised for the policy they had pursued. Unlike some other countries.

As professor John B. Taylor (the author of famous Taylor rule) points out in his latest interview for “Polityka”, one of the main causes of the financial crisis were too low interest rates. He also blames central banks and government for inapposite responses and openly condemns monetary policy run by Alan Greenspan and Ben Bernanke. This short interview might be helpful in understanding the origins and mechanics of what has been called the worst recession since the Great Depression.

Four down, one to go...

It’s the right time to give off some optimism and there’s a concrete reason behind it. The term of current president of Poland will end exactly in a year. And like many Poles I believe this is bound to happen, especially after Janusz Palikot has filled me with confidence, saying that “voters have their heads screwed in”.

Meanwhile Mr Kaczyński is encountering the interminable problem of friends, or rather lack of any. Nobody knows why, but all prominent economists in this country steer clear of the presidential palace and the head of state himself. But those are not the experts who are reluctant to advise the president, that is Lech Kaczyński, who is biased against them and unwilling to take them on. For the first time this became a burning issue, when the president had to appoint a central bank governor. After a long-lasting anguish be finally selected Sławomir Skrzypek (sorry, but this guy doesn’t even have his entry in English wiki!), whose qualifications for this position have been… Well there could have been some other eligible candidates…

The history has repeated itself recently. This time the president had to point three (out of nine, the remaining six are appointed by the houses of Polish parliament) members of the Monetary Policy Council and he was in a fix… Eventually he selected:

Zyta Gilowska, until 2005 a member of Civic Platform, then joined Law and Justice and took office of finance minister in the cabinets of Kazimierz Marcinkiewicz and Jarosław Kaczyński. By running a pro-cyclical fiscal policy (just recall cutting the social benefit premium in 2007), she greatly contributed to the current public finance deficit. Her motto: “It’s running well, so let’s add fuel to the fire.” Views on monetary policy: unknown, but inferring from her past moves, I suppose she’s likely to put forward cuts of interest rates to stimulate the booming economy.

Wojciech Roszkowski, politician, member of Law and Justice, currently deputy to the European Parliament, a graduate of Warsaw School of Planning and Statistics, specialises in economic history. (Any) knowledge or views on monetary policy: kept in the dark

Adam Glapiński (this chap’s biography doesn’t occupy space on English wikipedia servers as well), a dedicated friend of the president and one of his economic advisors. His field of studies in the history of economic thought, in which he lectures at my school. His rousing lectures are tinged with digressions on the current economic order of my beautiful country. The most often repeated waspish remark is that the independent Poland after 1989 is just a “PRL in disguise”.

The new makeup of MPC is… Hard to pick a right word… Crippled?

Mr Crisis, how are you keeping?

Regrettably, Mr Crisis doesn’t have any embodiment and I can’t ask him about his mood. Maybe in the real economy things are getting better, but in the wellspring of the current crisis, namely in banking sector I spot something what I’d call a relapse…

Facts and figures:
1) According to the latest projections of Ministry of Finance and chief economists of leading banks, the year-on-year inflation rate in April crept up to 3,8 – 3,9 per cent.
2) The interest rates on the inter-bank market were rising steadily in April, in the first days of May they shot up.
3) Without any effort one can find a 3M bank deposit with an interest rate of 6 per cent.

Comments:
1) With the central bank’s benchmark rate at 3,75 per cent, one would say simplifying (the rates do not refer to the same time period) that we move towards a situation when the real interest rates drop below zero!
2) The central bank’s rates have nothing to do with the real costs of financing for banks, the discrepancy between them is swelling (today 67 base points), the inter-bank market rates are drifting from the outer space, where they were sent by decisions of Monetary Policy Council, towards the Earth, I guess.
3) Yesterday I paid some of my savings in 3M deposit with the annual interest rate of 6 per cent, whereas yesterday’s 3M WIBOR amounted to 4,38 per cent. Neglecting the fact that settlements between banks are made two days after concluding the transaction, bank paid for my deposit roughly WIBOR + 1,62 percentage points. If the same bank granted in, let’s say, 2006 a mortgage with the interest rate calculated at WIBOR + 1,50 percentage points, bank is nowhere else but in dire straits. Evidently, it’s a big simplification, bank will eventually be in the black – it’ll shift the costs on other clients, excluding me, banking charges do not apply to me ;)

Conclusions:
1) By cutting interest rates central banks probably won’t stimulate the economy, but MPC would probably keep loosening monetary policy just to shun accusations of lack of reaction to deteriorating economic indicators. If we can’t revive the flabby economy, let’s make the effort to curb the inflation, which threatens our savings.
2) The crisis came over once again, now it’s about time we sought after an expedient to relieve the pain.
3) Hikes in banking charges are inevitable in a situation banks pay over the odds for the deposits.

Now up to you… Having any ideas how to restore the balance and not to let the bloodstream of the economy go under?

My own proposal is to push the central bank’s interest rates up, gently, by 25 base points, so that the benchmark rate jumps up to round 4 per cent. Of course you can do me down, call me a lunatic, accuse me of signing a death warrant… Alright, I’ll concede if you prove me wrong, but firstly I’ll hold out for the justification.

Beware! There might be a catch…

Feel invited to the discussion!
Czyli zapraszam do dyskusji!

Putting a spoke into his wheel?

Diplomacy is one of those realms in which one has to comply with the certain patterns of behaviour, even if they seem unreasonable… That’s why I have conflicting feeling after receiving the news of Polish Prime Minister’s delivering a speech about (doubtless) virtues of balanced state budget and highlighting this as reason why Poland keeps its head above water in the times of downturn. Was it really a dig at reckless fiscal policy of UK, or just a way of emphasising our accomplishments in that field? Tusk didn’t mean (as he claims) to any other economy but more or less involuntarily pounced at failure of Great Britain with its economy declining for the third quarter in a row… Is anybody to explain me if the British media were right to outrage at Tusk’s speech? Was it a blunder to boast about soundness of one’s own economy, while standing next to the Prime Minister of the country engulfed in recession?

PS. In case of MPC (RPP) session – predictably rates are unchanged…

Just to keep you in the picture...

Cause actually nothing special (watch out for the bright response at 1:30). I got over after the translations, the next commissions don’t appear on the horizon, so hopefully I’ll spend the coming weekend ticking over rather than poring over something.

Except from this, Poland is shaken up by mushrooming reports on the cases of leakages and other irregularities during the gimnazjum final examinations (I’d dare to say it’s an equivalent of British O-Level – correct me, if I’m wrong, as usually). Such things have already happened and will surely happen, so what’s the point in drawing our attention to? Thousands of school leavers fray their nerves, an outgrown (18-year-old) school leaver and a charlady from his school will get to know each other better in a cell, a principal of the hapless landed in the hospital and pupils from the ill-fated school will have to repeat their examination. Tough luck – the price they had to pay for their folly – that’s what we call a collective responsibility…

Meanwhile the crisis is keeping well, Wall Street Journal announces Chrysler is going to go to the wall next week. Worth highlighting is that we all got insesnitive to the crisis, stock exchanges no longer react on the newly revealed data from real economy, IMF revises its forecasts and projects a contingent contraction of Polish economy. Germany and Great Britain are facing the deepest recession since WW2 and at least outwardly nobody cares…

Bank salespeople were looking for new clients on cemeteries and taking down their names from graves to set up current accounts and credit cards for them. Please keep in mind the sentence “How low can they stoop to live up to their superiors’ expectations?” That’s to illustrate the absurdity of sales target plans…

And the last point before the upcoming session of Monetary Policy Council – I’m sticking to the projection of stopover… And now I dash away to sound out what’s going on in the village…

Expect the next expert’s post on the procedures and conditions of submitting BA thesis – that will be a set of guidelines for the ones who got lost in the bureaucratic jungle of Warsaw School of Economics.

PS. Due to redecoration the dean’s office will be closed within the next week…

Next cut / Winter’s back!

This time the overwhelming majority was right (and I was, quite unsurprisingly – wrong) – The MPC cut the interest rates for the third time this year, according to the prediction – by 25 base points. These were probably strengthening zloty, mid-term inflation projections and slump in consumer confidence accompanied by a fall in retail sales that tipped the balance in favour of the doves. I’m wondering now if the forecast of BNP Paribas Bank on zloty (5,40 PLN/EUR in third quarter of 2009) is correct – perhaps it’s only the next spur on the speculation on our currency.

It seems that the winter keeps us in its grip and is unwilling to give way to the long awaited spring. Today the honour of being snow-capped fell to Warsaw – 10 centimetres of wet, heavy snow swathed and probably paralysed the city.
Mateusz (if you finally popped in) – lucky you, you knew when to leave for Greifswald to wriggle out of clearing up the yard - see below the one in front of my house today just at the crack of dawn (6 a.m.).


A tractor with a plough traditionally pushed the chunks of snow sideways, so I had to remove these blocks of snow mixed with the mud – it’s typical for Polish mentality – the road was made passable but the drives in front of the gates were obstructed by after-snow mud cleared off the road…
Hopefully the meteorologists are right and the winter recedes the coming weekend, although I’ve heard that the scenario that winter stays with us until Easter is still conceivable (but who’d believe Andrzejek Zalewski from Ekoradio).

A short economic review...

Even very short. Not to break the tradition I feel bound to foresee the next move of Monetary Policy Council… And something (this time probably only my common sense) tells me it will make a stopover in the cycle of loosening monetary policy. The last week brought us some optimistic news from the economy – zloty has strengthen against other currencies, indices of Warsaw Stock Exchange bounced back... Nevertheless, I’m still holding the view that the prospects of the future do not look so bright – forecasts of GDP growth are continually lowered, the annualised rate in the first Quarter of 2009 is expected to be around one and a half per cent. Reassuringly, inflation rate will hit the target in the medium term (but it gives some room for further cuts). Bank Goldman Sachs (advised by my idol Kaziu) has recently issued a note bringing on taking short positions in the speculation on zloty. BTW did anybody notice the positive correlation between the exchange rate of zloty against other currencies and the indices of Warsaw Stock Exchange (the stronger zloty is, the more the share prices rise). That only proves it is driven mostly by foreign investors…
The next post will appear in about a week. It’s neither my lack of patience, nor my lack of inspiration, the lack of time is here to blame.
And a recommended piece of reading for today - I promised something abou conspiracy theories...
Take care :)

Cięcie! / Cut!

Na przekór większości analityków Rada Polityka Pieniężnej obniżyła stopy procentowe o 25 punktów bazowych. Prawdopodobnie jest to najrozsądniejsze co można było zrobić w obliczu słabnącego złotego, załamującej się dynamiki sprzedaży detalicznej i obaw o wzrost gospodarczy. Delikatny, ostrożny ruch wydaje się być adekwatny do sytuacji ekonomicznej i daje sygnał, że z naszą gospodarką ani walutą nie jest naprawdę źle. Miesiąc temu odważyłem się przewidzieć kolejny ruch, tym razem nie mam bladego pojęcia, co stanie się za cztery tygodnie. Inflacja r/r w lutym będzie prawdopodobnie wyższa niż w styczniu za sprawą słabnącego złotego, dane o produkcji przemysłowej, tempie wzrostu gospodarczego czy optymizmie konsumentów prawdopodobnie się pogorszą, być może decydująca okaże się sytuacja na rynku walutowym. Teraz poczekajmy na konferencję Rady i uzasadnienie decyzji...
PS. Przewidzenie ruchu RPP jest raczej kwestią intuicji i szczęścia, a nie wiedzy ;)
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Contrary to the analysts’ forecasts, Monetary Policy Council cut the interest rate by 25 base points. Probably that was the most rational move as they were faced with weakening zloty, dropping retail sales dynamics and anxiety about economic growth. Cautious move seems to be pertinent to the economic situation and doesn’t raise concerns about our economy and currency. A month ago I dared to predict the next move, but this time I have no notion what’s going to happen in four weeks. Year-to-year inflation will be probably higher than in January, owing to the zloty’s appreciation, figures on production volume, pace of growth or consumer confidence are likely to deteriorate, the deciding factor may turn out to be situation on the currency market. Now let’s wait for the Council’s conference and justification of the decision…
PS. It’s not knowledge but luck and intuition that let you foresee the next MPC move ;)