Thursday, June 16, 2011

Inflation nation

Polish inflation shot up in May. The main CPI index spiked to the nearly decade-long high of 5.0%. The expectation was inflation would hit 4.6%. So, economists, commentators and market players were floored.

Over at beyondbrics, the Financial Times' Jan Cienski writes that the inflation game has become increasingly political, citing an interview with Economy Minister and Deputy PM Waldemar Pawlak. He notes that Pawlak says higher rates could slow GDP growth by curbing demand and suggests that somehow this is government policy.

I think this is a step too far. For all its failings, I don't honestly believe Finance Minister Jacek Rostowski or Prime Minister Donald Tusk have any intention of trying to set interest rates or to make the council vote one way or another. After all, Tusk's government appointed 7 of the council's 10 members just over a year ago and could have picked super doves if it had wanted.

Second, Pawlak has been arguing against rate hikes and for rate cuts for at least a decade. His mantra is so set that there are in fact three certainties in Poland: death, taxes and Pawlak opposing rate hikes (or tryign to talk the zloty weaker -- his other favourite bugbear).

Pawlak's problem is that few who actually have a market impact pay any attention. And, though MPC member Elzbieta Chojna-Duch, the biggest dove at present and the choice of Pawlak's party, was probably selected for her dovish leanings, there is no evidence the council listens at all.

I thus don't see how the inflation story is becoming increasingly political. Politics did probably affect the MPC early on in its term in spring 2010, but the council has been surprisingly united of late. It voted 9-1 in favour of hiking interest rates in April, reports say the May hike was backed by a similar scale, and I suspect the June hike was also supported by a wide margin. This suggests a council increasingly united and not influenced in any way by political factors.

The MPC is many things. It has been a poor communicator. It is way behind the curve for some and way ahead for others (at least Pawlak). But the one thing its rate policy is not these days is political. As they say here in Poland, thanks god.

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