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Sharp increase in the CPI inflation rate registered in July (11.6 year-on-year up from 10.2 in June) raised doubts about the efficiency of the monetary policy of the National Bank of Poland (NBP). Not only the end-of-year monetary policy target of 6.8% CPI became totally unrealistic – the growth of prices in January-July has already exceeded 6% - but the slippage may be even bigger than a year ago. To what extent the central bank may be blamed for this serious failure?

Well, not as much as it seems at the first glance. Firstly, the increase in the CPI inflation figures came mainly from the sources beyond the control of NBP. As the graph shows, the main factors responsible for the growing inflation over the last 12 months are prices of fuels and transport services together with prices of food (mainly cereal products and pork). Both increased due to the uncontrollable factors: extremely high prices of gas together with a strong dollar were pushing up the transport inflation, while the poor harvest caused by a draught was pushing up the food inflation. Obviously, a faster and more radical liberalization of the import regime for cereals – higher duty-free quotas - could seriously reduce the pressure, but the decision in this field belongs fully to the government, and not to the central bank.

Secondly, these factors were generally unpredictable. Until the drought time came, all the leading forecasting institutes, including NOBE, were projecting a fall of inflation to ca.7% by the end of 2000. The disinflation process seemed to be, broadly speaking, consistent with the upper band of the monetary policy target. Only recently the forecasts were raised to 8-9%, however, with some additional conditionality on the correct governmental policy response to the growing prices of cereals.

Finally, despite all the unfavorable developments, the other goods and services inflation – excluding fuels, transport and food – was either flat, or slightly falling. So, whatever was within the reach of the bank, remained under control.

The fact that the NBP responsibility for missing the inflation target for the second year in the row is not big does not mean everything is fine with the monetary policy. One obvious remark is that the bank has chosen the monetary policy strategy – direct inflation targeting based on the headline inflation – that seems to be too ambitious. A more cautious approach, based on the core inflation target – CPI excluding prices of the most volatile and uncontrollable items – would be less shiny, but far more realistic, given the instruments that the bank has got in its hands. Another remark is that one can hardly expect a success in the disinflation policy in Poland unless the policies of the NBP and the government are coherent.

Obviously, the monetary policy is at the crossroads. Reaching the medium-term policy target of pushing inflation down below 4% by the year 2003 becomes very difficult, while the credibility of the policy – after two consecutive failures to reach the policy goals set by the bank itself - is in danger. The bank is likely to raise both the interest rates and the current year CPI target soon, but the problems remain. A more in-depth analysis of the sources of the setback, and a possible re-formulation of the monetary policy strategy may be necessary, if the disinflation process is to continue.

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