Polish central bank policy not restrictive enough, Tyrowicz says

By Gergely Szakacs Feb 16 (Reuters) - The Polish central bank's policy stance is not restrictive enough given strong momentum in core inflation, rate-setter Joanna Tyrowicz told Reuters, adding that policymakers should not be side-tracked by worries over an economic slowdown. Last week the National Bank of Poland left its main interest rate unchanged at 6.75%, as expected, the fifth month in a row, remaining in wait-and-see mode as it assesses the damage to the economy caused by the war in neighbouring Ukraine. Central Europe's biggest economy is expected to run the European Union's second-highest inflation rate at 11.7% this year based on the European Commission's latest forecasts, with economic growth stalling after a 4.9% expansion in 2022. January figures published on Wednesday showed Polish headline inflation climbing to a lower-than-expected rate of 17.2% in January. Poland's central bank expects inflation to pick up in the first quarter before it starts falling back into single digits later this year. However, Tyrowicz, who is in a hawkish minority in the 10-member rate-setting Monetary Policy Council, said headline inflation was very strongly influenced by regulatory changes, which reduced its effectiveness in guiding central bank policy. "If you take core inflation instead of CPI, then the trends that we've seen before continue. Core inflation is still gaining momentum," she said. "Do I believe that interest rates should be higher? The inflation rate is above 17% and the target is 2.5%. Yes. Certainly, we need higher interest rates." She added that even though the effects of hikes worth over 600 basis points in the bank's main rate were beginning to show, decisionmakers should not lose sight of their main objective of bringing inflation back to target. "We cannot be side-tracked by worries of slowdown because our job in bringing inflation back to target is far from done," she said. Tyrowicz, appointed to the bank's Monetary Policy Council in September by the opposition-dominated Senate, said core inflation was expected to exceed 10% throughout 2023, while headline inflation would run largely unchanged from last year. "I do not see much disinflation," she said. "The path towards our policy target of 2.5% is not well-defined. If an economy ends the year averaging roughly the same as in the year when tightening of the monetary policy started, then such an economy is clearly not on track to target." She said while much of last year's inflation was driven by external factors, such as rising energy prices and weakening exchange rate, in 2023 most of it would be "home-grown," due in part to double-digit wage increases, which are inconsistent with the bank's inflation target. Poland has raised the minimum wage sharply this year in the run-up to a parliamentary election due in October or November.

As a result, inflation this year may require stronger fiscal and monetary policy response, Tyrowicz said. She said the policy debate in Poland has been hijacked by the question of what level of interest rates mortgage borrowers can cope with and the potential risks to employment from monetary tightening. "If we improve the communication and are more effective in managing inflation and real economy expectations in the months to come, then the extent to which monetary policy will have to become more restrictive can be mitigated," she said. Tyrowicz also said any discussion of rate cuts in the current environment was premature. "When stakeholders ponder rate cuts, they effectively undermine the efficiency of the current relatively restrictive monetary policy stance," she said. (Reporting by Gergely Szakacs Editing by Tomasz Janowski)