Polish Left Make Rate Cut Pressure Personal By Wojciech Moskwa Reuters Wednesday, June 6, 2001; 11:46 AM WARSAW, June 6-A plan to slash the pay of Polish central bankers, who refuse to lower interest rates to stimulate growth, could backfire by pushing monetary officials into keeping rates high to assert their independence, analysts warn. Parliament is expected to vote later this week on a controversial motion to cut bankers' wages by up to half when it rubber stamps a package of measures needed to adapt the National Bank of Poland's charter to European Union standards. The motion, drafted by the leftist opposition likely to win a general election in September and form the next government, is the latest in a series of initiatives floated by the ex-communists attacking the central bank's independence. A similar motion was also drafted by the populist Peasant Party. "It could prove counter productive. While this threat hangs over their heads, they (the Monetary Policy Council) can't really move (rates) since they really can not take the risk of appearing to bow to pressure," said Robert Beange, economist at Lehman Brothers in London. "A rate cut is really off the cards until this is resolved," said Beange, adding that a rate reduction could take place in July at the earliest. The 10-member MPC's main interest rate is now at 17 percent, more than 10 percentage points above year-on-year inflation, which has curbed domestic demand, slowed economic growth and helped narrow a current account gap. The wage cut proposal was met with accusations by one MPC member, Boguslaw Grabowski, of "revenge or blackmail" over the panel's refusal to bow to political pressure to cut rates. Grabowski also warned that what he called a "frontal attack" could result in the resignation of several MPC members, a threat which raised concerns in financial markets over whether Poland can stick to a prudent monetary policy course. The bill proposes to cut in half the wages of MPC members, now roughly between $6,000 and $10,000 per month, or 11 to 18 times above the average wage in Poland. By comparison, members of the Bank of England's MPC earn some $16,000 per month, bankers said. Financial markets have not so far reacted strongly to Grabowski's threat, with the zloty edging only slightly lower on Wednesday after touching new record highs against the euro earlier this week. "Some political pressure on central banks is normal...It can be damaging if there is significant risk that politicians will change the central bank's resolve to bring down inflation," said Andrew Kenningham, an analyst at Merrill Lynch in London. "I doubt it will come to that in Poland," he said, adding that the wage cap proposal was "absurd." The Polish Association of Business Economists went further, saying in a statement that "punishing monetary officials simply for using the policy instruments available to them with the lowest form of populist rhetoric is unacceptable." Analysts said it was too early to determine if Grabowski would carry out his threat to quit or if he was only pressuring MPs to reject the measure, drafted by members of the opposition Democratic Left Alliance (SLD). If he did quit, a new MPC member would have to be elected in the heat of an election campaign. But the rate-setting MPC could still in theory change rates, which requires a quorum of five members, including chairman Leszek Balcerowicz. The SLD, which polls show winning the September 23 election, has kept up its attacks on the MPC's restrictive approach and wants to shift responsibility of setting inflation targets to the government. "The MPC is like a fortress where 10 people have barricaded themselves and do not let anything in, even food...This (wage cut) bill appears to be an attempt at starving the MPC into submission but this is not our intention," senior SLD official and former Finance Minister Marek Borowski said on Wednesday. "The MPC and the central bank are independent and we do not intend to infringe on that, although I think their policy is mistaken and harmful. But the government should be setting inflation targets," Borowski told a foreign investors forum. Still the leftists may be more bark than bite as the move would likely anger the European Union, which prefers fully independent central banks, say analysts. The SLD, eager to shake off its often ugly communist past, strongly back's Poland's drive to join the EU in the next wave of enlargement expected around 2004. Analysts said that a similar spat between the Czech government and central bank at the turn of this year, which led to a "sharing" of inflation targeting between the two, had ultimately led to a softening of monetary policy there. It is unclear if such as move would also lead to a loosening in Poland, but, most analysts agree Polish rates are too high. "Outside the MPC, there is a consensus that rates are now too high, perhaps by 200 basis points," said Merrill's Kenningham.
