Today the monetary policy council of the central bank begins two days of deliberations. It is widely believed that there will be a further cut in interest rates announced tomorrow. Polish exports, which for years were growing month on month, are now stagnant if not falling. In February 2002 they had fallen to the level of last August which in real terms means a fall of twenty percent. According to external trade magazine Rynki Zagraniczne, thirty percent of small businesses have completely given up on export. The reason for this is the strong PLN. The strength of the Polish currency means that exporters get less for their work than they would have received one year ago. This is having a major impact on profitability.
Finance minister Marek Belka told us yesterday that he considers that PLN is overvalued as far as the export market is concerned but that he can do nothing about it.
All the blame is falling on the monetary policy council (RPP) of the central bank which has enforced on Poland one of the highest rates of interest in Europe. The controversy around this is hitting the economy hard as no-one would argue that PLN is strong other than artificially. Marek Belka claims that he suggested last August a dramatic rate cut completely out of the blue in order to defeat speculators. However economists are saying that it is not the high interest rates but the expectation that they will be lower that is strengthening PLN. Every time rates fall, short term bond holders can cash in. As they are nearly always foreign investors they must buy bonds in PLN thus keeping the rates of the Polish currency high. Therefore logically the only way of stopping the rise of PLN is stop speculation on further rate cuts. Miroslaw Gronicki, the head economist at BIG BG says that if investors sold their bonds and bought foreign currency with the cash raised then PLN would fall in value.
At the same time it is worth looking at what happened in those countries where the central bank reduced rates in order to help exporters. The effect was the opposite of what was intended.
The best example is Israel where there was a similar situation to that of Poland. Inflation was low and the shekel was high. Under political pressure the central bank opted for a big rate cut in December. The shekel plunged but inflation went in the opposite direction thus wiping out the effects of the rate cut. Israeli exporters found themselves in a worse position than they were before.
Jacob Frenkel, MD of Merrill Lynch International and the former head of the Bank of Israel said that profits gained from the reduction in the value of the currency were eaten away by inflation. To that must also be added the cost of destabilising the economy and social costs which were caused by the sudden impact of inflation.