July 5 (Bloomberg) -- Polish central bank Governor Marek Belka said the government must ignore election-year pressures and focus on controlling the budget deficit, even though its finances are stronger than many European nations.
Failure to do so may lead investors to shun Polish bonds because of concern about Europe’s sovereign debt crisis, said Belka, 58, who headed the International Monetary Fund’s European department until he became governor last month.
“You don’t want to be singled out by the markets as a bad performer, and the conclusion has to be adjustment on the fiscal side,” Belka said in a July 2 interview in Warsaw. “Poland is in a good situation compared to its peers, but come on, this is a different world. Nobody is 100 percent crisis-proof.”
The government, which faces a general election next year, has pledged to cut the budget deficit to the European Union limit of 3 percent of gross domestic product by 2012 from 6.9 percent this year. Poland needs to roll over 206 billion zloty ($62 billion) of debt in 2011 and 2012, up from 46.2 billion zloty this year, according to data compiled by Bloomberg.
Belka, who prepared election-year budgets in 1997 and 2005 as finance minister and prime minister, respectively, said he doesn’t favor tax increases, and spending controls should be enough to narrow the deficit to acceptable levels.
“We are not accepting the notion that if an election is coming, then nothing can be done,” he said. “We are not in the situation of a country that is close to default. We simply need some common sense and a little bit of discipline.”
The “most serious danger” to Poland’s economy is financial-market turbulence churned up by euro-area debt problems, which may keep the euro weak and trigger swings in the value of the zloty, Belka said.
The central bank’s strategy of targeting 2.5 percent annual inflation was supported by the zloty’s “persistent appreciation tendency,” which may have come to an end, Belka said.
The zloty gained 43 percent against the euro from May 2004, when Poland entered the EU, to September 2008, when the failure of Lehman Brothers Holdings Inc. kicked off the global financial crisis. Since then, it has weakened 19 percent, more than any of the 26 emerging-market currencies tracked by Bloomberg, except the Icelandic krona.
While the zloty is particularly exposed to the euro’s declines, weaker currencies may fuel an export-led recovery in Europe, Belka said.
“A weakening of the euro can have a complicated effect on stabilizing inflation,” he said. “However, I would rather have a fast-growing economy in which we have to act decisively on the inflation front. We are prepared to do it.”
Belka said market volatility was behind his decision to remove a passage summarizing inflation risks from the central bank statement released after the June 30 rate meeting, his first as head of the 10-member Monetary Policy Council.
Analysts had used the sentence to gauge the central bank’s policy stance.
“The situation has changed in the sense that we have volatility of factors, and it would probably be wrong to pre-commit,” Belka said. “The former way of communicating with the markets was proper when the different factors impacting inflation prospects changed in smooth, linear ways.”
Dropping the inflation risk statement for a sentence reporting that the panel discussed “factors that may intensify inflationary pressure in the medium term,” was interpreted by some economists as a suggestion that higher interest rates were on the way. The central bank has kept its key seven-day reference rate at 3.5 percent since June 2009.
“The risk we identified of a change in the policy stance has come to pass, albeit in a camouflaged form,” BRE Bank wrote in a July 1 note to investors. A “pre-emptive or even reactive” rate increase is probable late this year, BRE said.
‘Bump’ in GDP
Belka downplayed the central bank’s July 2 GDP forecast, which showed the economy growing 4.6 percent next year, compared with a 2.9 percent estimate in February. The spurt will be short-term and is due primarily to infrastructure investment co-financed by the EU, he said.
“What we see is sort of a bump,” Belka said. “It may happen, but it has no lasting effect on the longer-term price evolution.”
While Poland’s economic rebound is “more robust” than expected, the central bank is “concerned that the recovery in Europe will remain tepid,” Belka said.
Those kinds of comments suggest Belka is concerned Polish growth may falter if deficit-cutting measures in the euro area stall the recovery, Marcin Mrowiec, chief economist at Bank Pekao SA in Warsaw, said in a July 1 research note.
Pekao is now “leaning” toward the view that growth will slow in the second half on slumping exports, suggesting “rate increases will probably not happen” this year, he said.
Belka’s one mention of interest-rate moves was in reference to a suggestion by the IMF, made after a mission to Warsaw on March 15, that rate cuts might be warranted to curb zloty gains.
“I wouldn’t subscribe to this at this juncture, because of the volatility on the markets and the relative weakness of the zloty,” he said.
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