Saturday, March 05, 2011

Week in review…

The week contained one main event for Polish economy watchers: an interest rate hold (here and here and here and here and here). The central bank's rate-setting Monetary Policy Council decided to hold rates at its monthly policy sitting this past Wednesday. The decision was expected by the majority of analysts, though there was a sizeable minority who predicted an interest rate increase. The MPC chalked up its decision to the fact the big rise in inflation in January was attributed to factors outside its control and the economic recovery was not yet generating undue inflationary pressure. Risks to growth also loomed, the council warned.

So far, so good. As I have previously noted here, the council's first year was marked by the philosophy of "chillin'" as it did not change interest rates and whether it was the "worst council ever," a question one blogger posed, would be tested this year and next. Communication will play a huge role. That is, is the council getting its message across in a way understood by close observers and players in Poland's various markets?

The early answer is "no." If the communication process were smoother, then such a big minority expecting a hike could not have been existed. Analysts would already have seen the comments from those of the 10 MPC members that spoke, watched the data for potential triggers already given by council members and then made the appropriate call. Many did, but not all.

Those that did expect a hike seem to have downplayed MPC members' comments and focused on the data. Inflation jumped to 3.8 percent in January against the same month of 2010, hitting a 21-month high. This could increase people's expectations of future inflation, making them demand higher wages. That increases demand, which boosts inflation and so on in a wage-inflation spiral.

The hike believers also noted that global commodity prices are surging and the zloty has been weak, meaning imported prices rise even faster. Considering the MPC hiked in January citing risks of high CPI inflation and the impact on inflation expectations, those expecting a hike might be forgiven for asking what changed. From their standpoint, the communication, or reasoning, behind the January hike remained true and thus the overall communication policy is faulty.

Monetary policy making is not just about the data of course. It is also about voting strategy. To pass, a motion requires 6 of the 10 MPC members to back it. Or there can just be 5 as long as one of them is NBP Governor and MPC head Marek Belka, who has a tie-breaking vote.

Belka, one must remember, was a little stung in early January on precisely the issue of communication. The NBP governor gave an interview in early January to Reuters dropping his previously dovish tone and taking a hawkish one. Instantly, everyone expected a hike in January. But just before the January 19 sitting at which the hike came through, a previously given interview in December for a tabloid made him seem dovish, making a bit of a mockery of Belka's communication strategy.

Since then, Belka -- and I'm sure the other 9 members as well -- have been adamant to give one or two talking points in their interviews and by and large to be fairly straight on which way they will vote. Because the council appears fairly evenly divided, Belka's vote is most important. He is also the most prestigious, having reams of domestic and international experience. So if Belka decides to support a hike, it is likely to happen. From this end, if the council did not leave rates unchanged, the council's communication strategy would have looked faulty to the core.

So, either way the communication strategy would have been questioned. Clearly, more work needs to be done on this.

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