Poland Must Raise Rates, Cut Budget Gap at Same Time, Hausner Tells Rp.pl

Poland needs to narrow its budget deficit and raise interest rates at the same time to avoid a loss of investor confidence that could trigger a “drastic” weakening of the zloty and a surge in inflation, Jerzy Hausner of the central bank’s Monetary Policy Council wrote in an article published in Rzeczpospolita newspaper today.

Simultaneous fiscal and monetary tightening, in a “safe scenario,” may slow Poland’s economic growth for four to six quarters, according to the article co-written with former Finance Minister Miroslaw Gronicki and published on the newspaper’s rp.pl website. Economic growth may slow from about 4.5 percent in the first half of the year to below 2 percent in 2012, if the “strong twin tightenings” are needed, Hausner and Gronicki wrote, according to rp.pl.

Poland must increase domestic interest rates because of global price rises triggered by the monetary and fiscal stimulus adopted during the financial crisis, and because the central bank needs to maintain the spread of domestic interest rates over the euro area’s when the latter begin to rise, Hausner and Gronicki said, rp.pl reported.

“If this disparity were to significantly narrow, a drastic depreciation of the zloty could occur and inflationary pressure would grow,” Hausner and Gronicki said, according to the text of the article in rp.pl.

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