Poland Will Need to Raise Rates to Stem Inflation, Hausner Says

By Katya Andrusz

Sept. 7 (Bloomberg) -- The Polish central bank’s new rate- setting council will need to raise borrowing costs after it is selected in February to curb inflation, said Jerzy Hausner, an informal adviser to the government.

“Monetary policy in Poland will have to be much tighter than it is now,” Hausner said in an interview in Warsaw on Sept. 2. “Inflation is definitely going to be one of Poland’s future problems.”

The European Union’s largest eastern member and the only one that emerged from the global crisis without falling into recession must balance the need to keep price growth under control and sustain growth as the economy recovers from near- stagnation in the first quarter.

Annual inflation has remained above the target limit of 3.5 percent for 15 of the past 18 months. The Finance Ministry on Sept. 1 said the rate probably rose to 3.7 percent in August. The benchmark interest rate is at a record-low 3.5 percent.

While other post-communist nations in the region suffered from contractions, Poland’s gross domestic product was buoyed by its large internal market, which shielded it from a drop in exports as demand from its rich western neighbors waned.

Even so, rising unemployment and the effect of higher rates on investments are risks to the economy, said Hausner, a former economy minister who heads the economics and public administration department at the Krakow University of Economics.

‘Hit That Hard’

“We’ll start having problems with private consumption soon as a result of the labor market situation, and I don’t believe that we’ll reach our export levels from before the crisis any time soon,” he said. “Investments will be far more important than before, and tighter monetary policy will hit that hard.”

The economy expanded an annual 1.1 percent in the second quarter. Hausner said the recovery will be tentative, without an acceleration in the last two quarters and may last longer than some economists predict. He sees GDP stagnating or rising 1 percent this year.

“It doesn’t make much difference where it is on that scale, growth will be far, far slower than last year,” he said. “We haven’t come out the other side of our difficulties yet.”

Prime Minister Donald Tusk said on Aug. 28 Poland would need “serious fiscal discipline” to rein in the deficit.

The European Commission, the EU’s regulatory arm, in May initiated a so-called excessive budget deficit procedure against Poland after its shortfall shot above the bloc’s limit last year. The Organization for Economic Cooperation and Development predicted the general government deficit to reach 6.3 percent of GDP this year.

‘Growing Problems’

“Next year’s budget will be extremely difficult, and slightly higher growth than was expected in the second quarter won’t put a stop to the growing problems,” Hausner said. He added Poland needs annual growth of “at least” 4 percent to “put us on the safe side with the budget and allow us to continue catching up with western Europe.”

Hausner said the new Monetary Policy Council will have to ignore pressures to keep rates low at the expense of boosting inflation.

“The current council is coming to the end of its term and is very likely to keep its stance neutral,” he said. “We need to have a balanced Monetary Policy Council that’s composed of people who think independently and don’t make decisions as a result of outside pressure.”

The MPC will end its term early next year. The president and the two chambers of parliament can each recommend three members to the 10-seat body. Bank Governor Slawomir Skrzypek, who took office in January, 2007, is the 10th member, with the power to break potential ties.

To contact the reporter on this story: Katya Andrusz in Warsaw at kandrusz@bloomberg.net