Polish Interest Rates May Rise If Deficit Stays Wide, MPC's Hausner Says

Poland’s central bank may raise interest rates if the country’s budget deficit doesn’t narrow next year, Monetary Policy Council member Jerzy Hausner said today in Warsaw.

The bank may need to tighten policy if the fiscal shortfall remains at about 7 percent of gross domestic product in 2011, Hausner said at a meeting of economists today. Current trends in inflation, wages and lending don’t pose a threat to the central bank’s inflation target, Hausner said.

“If I were aware that the government had agreed to a plan that assumes keeping the fiscal deficit at the 7 percent level, I would treat it as in indicator for increasing interest rates,” he said.

The European Union’s biggest eastern member will post a budget deficit 7.3 percent of gross domestic product this year and 7 percent in 2011, compared with 7.1 percent in 2009, the European Commission said on May 5. Poland last July abandoned its 2012 euro adoption goal after higher unemployment depleted state coffers, sending the deficit to more than twice the bloc’s 3 percent limit. The central bank has left the benchmark rate at a record-low 3.5 percent since June 2009.

According to Poland’s convergence plan, the government targets a deficit of 5.9 percent of GDP in 2011.

Since the crisis started, zloty volatility has picked up, prompting the central bank in April to resume interventions for the first time in 12 years. The zloty gained 19 percent trough to peak from June last year through April 6, and has since lost 6.1 percent against the euro.

‘Potential Signal’

“The exchange rate may give a potential signal for monetary policy changes,” Hausner said.

Hausner, who has called zloty interventions “costly and not successful,” said the country should run a policy that prevents sudden currency swings.

“I see no problem in a stronger zloty as the currency is in a long-term appreciation trend and one should take that into account,” Hausner said. “The problem would be a drastic appreciation because companies have no chance to adapt.”

The central bank on April 9 bought foreign currency to weaken the zloty from a 16-month high. The zloty traded at 4.0846 per euro at 1 p.m. in Warsaw, down from 4.0727 yesterday.

To contact the reporter on this story: Monika Rozlal in Warsaw at mrozlal@bloomberg.net Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net

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