• Slower growth, volatile zloty may trigger rate change: Belka
  • Governor says loose fiscal policy may preclude cuts next year

A sharp slowdown in Poland’s economic expansion or higher zloty volatility may push the central bank to abandon its wait-and-see approach and move interest rates in either direction, Governor Marek Belka said in an interview.

The central bank has kept borrowing costs unchanged at 1.5 percent since March 2015 as the economy gains at one of the fastest clips in the European Union despite the longest bout of deflation in 60 years. While there are no indications that growth will slow, an expected loosening of fiscal policy next year could reduce chances for rate cuts, said Belka, who was in Washington for the International Monetary Fund’s spring meeting.

“The main reason would be a significant weakening of economic growth in Poland,” Belka said on Sunday. If credit stopped increasing or if there’s a “strange situation on the currency market, in either direction,” then a wait-and-see strategy “wouldn’t be right,” he said.

All but two members of Poland’s 10-person Monetary Policy Council have been replaced this year, casting doubt over the rate outlook, especially once Belka’s six-year term as governor ends in June. Jerzy Zyzynski, the most vocal proponent of easing among new policy makers, said in an interview earlier in April that a “few months” were needed before the conditions to cut rates can fall into place.

Policy ‘Trigger’

“If there is anything we can say about 2017, it’s that budget policy may be looser,” Belka said. “It’s not recommended to cut rates in such instances.”

Poland’s new government has implemented child subsidies more generous than in Norway, while planning to reduce the retirement age and increase tax-free income in future years. Unless it’s able to tap new sources of revenue, it risks widening the budget deficit, which last year shrank below the EU’s cap of 3 percent of gross domestic product for the first time since 2007.

Belka said he’s doing everything to discourage the government from reducing the retirement age and hopes the family subsidy program will “trigger a serious reform of taxes.” Without such an overhaul, “we’re in trouble” because there isn’t enough cash to finance the present child benefits “over the longer term,” he said.

‘Good Shape’

The governor said unprecedented monetary-policy easing in the euro area, Poland’s main trading partner, wasn’t doing too much harm to the zloty or yields on Polish government bonds.

The zloty has appreciated almost 4 percent versus the euro in the past three months, the 7th-best performance among 24 emerging-market currencies tracked by Bloomberg. Forward-rate agreements show derivatives traders are betting on 13 basis points of rate cuts in Poland over the next six months, down from as much as 38 basis points in January.

Ultra-easy policies by the European Central Bank, and other major monetary authorities, weren’t proving efficient at boosting longer-term economic growth prospects, Belka said. By contrast, Poland’s $545 billion economy is expanding close to potential, he said.

“We should be happy that we have 3.5 percent growth, or maybe even 4 percent, this is an exceptional pace,” he said. “I’m leaving the central bank with monetary policy and the zloty in good shape.”

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