As economies slow around the world—including the economy of the United States—we can expect central banks to quickly return to easy-money policies, most commonly manifested in central-bank efforts to force down interest rates.
Most central banks claim that their policies are guided by efforts to ensure “price stability” and keep price inflation “low”—variously defined. In the euro zone and in the US, for example, the central banks claim that monetary policy seeks to ensure a two-percent inflation standard. These are mostly political slogans, however, and what will really matter going forward is how long it takes each central bank to hit the panic button in the face of bad economic news.
If unemployment rates head upward, and if economies fail to perform as hoped—especially in election years—we can expect central banks to open the money floodgates again.
We’re already seeing some central banks lose their nerve. In China last month, for example, the People’s Bank of China lowered its one-year loan prime rate to 3.45 percent from 3.55 percent. That’s not a big change, but it was an early sign of how central banks are likely to respond to news of economic slowdowns—and a slowdown is increasingly apparent in China.
We don’t have to look to Asia to find new evidence, however. Wednesday, the National Bank of Poland (NBP) announced a substantial cut to its key policy interest rate. Reuters reports:
Poland’s central bank cut its main interest rate by 75 basis points to 6.00% on Wednesday, in a shock decision ahead of October elections that sent the zloty currency tumbling against the euro.
A narrow majority of analysts polled by Reuters had expected a 25-bps cut, but markets and economists alike were blindsided by the scale of the easing delivered. The zloty plunged 1.5% to its weakest level since May and banking stocks dropped over 5%.
Why now? Well, according to the bank, “In the Council’s assessment, recently incoming data point to a weaker demand pressure than previously expected, which will contribute to a faster return of inflation to the NBP inflation target.”
Observers who don’t take everything the bank says at face value are likely to find this statement unconvincing. The NBP’s target inflation rate is 2.25 percent. Yet price inflation in Poland remains above 10 percent as of August. Moreover, as recently as February, the price index hit a 23-year high in its growth rate, reaching 19.2 percent, according to the OECD. In other words, inflation in 2023 is the worst it’s been since the bad old days of the 1990s when Poland was still recovering from its years as a Soviet satellite.
A more likely motivation for the sudden cut is the fact that Poland is in the midst of an election year:
Poland’s robust economy is also showing some signs of slowing down and an election is approaching on Oct. 15 in which the conservative governing party, Law and Justice, is fighting for an unprecedented third term. The central bank’s governor, Adam Glapinski, is an ally of the party and has taken actions in the past to help it.
It’s unlikely this is all just a big coincidence. With price inflation running four times higher than the target rate, it’s hard to see why a 75-basis point cut would be the appropriate policy, just a few months after price inflation nearly hit 20 percent.
Poland’s central bank, like the US central bank, can claim whatever it wants in terms of its forecasts and analysis of “the data.” The NBP can simply say “we predict inflation will head down fast!” to justify its policies, just as the US’s Fed assured us for months that mounting price inflation was non-existent, then “transitory,” then “not entrenched.”
That said, the NBP can at least claim that its target policy rate remains near a twenty- year high. As with the rest of the developed world’s central banks, the NBP forced down interest rates for well over a decade following the global financial crisis in 2008. Then, it pushed the target rate down to zero percent during the Covid Panic. Price inflation headed up soon after.
Yet, as the NBP turns ultra-dovish once again, even more established economies’ central banks are either letting rates rise, or are simply holding their own target rates flat. The European Central Bank’s target rates continue to slowly rise. The central banks in the US, Canada, and Australia are all keeping target rates flat for now.
Yet, Poland’s central bank is hardly unique. It’s likely to be just the first domino to fall, with plenty of central banks behind it, as slowing economies become political liabilities for parties in power. In the US, the economic trends are already less than heartening. We’ll see how long it takes before the Fed goes the way of the NBP
