High risk economist. “The National Bank of Japan must do everything to prevent this” [OPINIA]

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The person himself does not know what abilities he has. For example, in my case, it turned out that I have prophetic abilities.

It seems to me that there are more people in Poland with such a gift. At the beginning of July this year, Rzeczpospolita asked dozens of well-known economists, with very different views, Whether interest rates will be lowered. And 98 percent answered yes. But when asked afterwards whether there were economic reasons for a rate cut in September or October, 93% said yes. He replied that there were no such reasons.

I write these words before the conference of the President of the Polish National Bank, who will certainly explain to us the reasons for this decision. The main argument is likely to be lower inflation, which was 18.4% in February and fell to 10.1% in August.

However, there will also be another strong argument: the economy slowed down, and in the first half of the year we experienced a recession (sorry, it will not be said that way, because according to the innovative definition given by the National National Bank) The word “recession” can only be used if GDP declines over the course of the calendar yearso you definitely can’t talk about it before October 15th).

Are these really strong reasons to cut interest rates seriously? And as a reminder: neither the Fed (inflation in the US is just 3 per cent) nor the European Central Bank (5 per cent in the eurozone and 6 per cent in Germany) have any intention of cutting rates. In Poland we have an inflation rate of 10%. Inflation expectations remain very high, although they are slowly declining.

The first argument, that is, low inflation, is of course important. But the problem is that The decline in inflation over the past six months is mainly due to lower fuel prices (8% since February), in addition to the slowdown in the growth rate of food prices. This, in turn, was the result of lower world prices for crude oil and agricultural products (especially cereals). When the trends of global price changes a year and a half ago were completely opposite, and Polish inflation was accelerating month after month, we heard that this does not constitute a basis for raising interest rates, because these are external factors that the Central National Bank cannot deal with. impact. I wonder why it is now?

The growth dynamics of food and energy prices have decreased significantly since February (and in the case of fuel prices, even lower – although lower). The question remains why these rates are so much higher in Poland today than they were before the outbreak of war in Ukraine., although the price of crude oil is lower and the dollar exchange rate is similar). However, the decline in core inflation, that is, calculated excluding food and energy, was small, not exceeding 12.3%. to about 10 percent.

Above all, prices for services seem to continue to grow rapidly. Not surprisingly, wages in enterprises are still increasing at a nominal rate of more than 10%, with a stagnant decline in labor productivity (in the entire economy, wage growth has been about 2 percentage points faster for a year).

But of course, there is also a second argument, the stagnation argument. Indeed, lower consumer demand should reduce upward pressure on prices. But we must remember that the main mechanism through which recession leads to lower inflation is a significant decrease in the dynamics of nominal wages.

And this decline occurs when people start to fear for their jobs. But today we have a different situation: despite the recession, unemployment rates in Poland are not increasing at all. It is a noticeable phenomenon in almost all western countries. Companies seem to have realized that in these times it is easier to fire an employee than to rehire them.

In short, although inflation is declining (and is likely to fall further), There is a great risk that this decline will slow soon and we will be left with inflation permanently at 8-9%. This is the main risk that the NBJ should look at today. He should do everything he can to prevent this, because experience shows that inflation at this level can persist for years.

How to fight such a threat? It is not necessary to raise interest rates immediately. The key here is that central bank policy must be highly credible. Even if the Bank does not raise interest rates today, we must be sure that it will not hesitate to do so in the future if inflation continues to decline. In order for there to be such confidence in the central bank, it must show that it takes its decisions on the basis of economic knowledge only. Do not allow any pressure from politicians. Because politicians often prefer not to fight inflation aggressively.

I leave it to you to ponder whether the current decision of the Monetary Policy Board serves to increase this confidence.

Professor Witold Orovsky, economist, publicist, university lecturer