January 6, 2013 10:18 pm

Central bank hails end to Polish austerity

The time for Polish austerity is over, Poland’s central bank governor has declared, saying central Europe’s largest economy has experienced a “perfect slowdown” instead of a slump.

Poland has slashed its budget deficit by more than four percentage points in two years, and one of the results has been that growth has slowed dramatically – only 1.4 per cent in the third quarter of this year as domestic demand falls in tandem with the crisis in the eurozone, Poland's largest export market.

“The pace of budgetary consolidation is slowing, which I hope will give the economy some breathing room. We are not encouraging the finance ministry to further excessive fiscal consolidation at this time,” Marek Belka told the Financial Times in an interview in December.

Poland's deficit hit 7.9 per cent in 2010, owing to the crisis and the steep increase in spending needed to absorb a flood of EU structural funds coming into the country. The deficit is expected to be 3.4 per cent in 2012.

While countries like Portugal and Greece have to continue to hack away at their spending in order to retain or regain market credibility, Poland, which has seen its borrowing costs drop to record lows in recent weeks, is not under any such constraints.

Mr Belka sounded a dovish note on monetary policy. The central bank's interest rate-setting monetary policy council was strongly criticised for being the only EU central bank to raise rates last year. Since then it has cut its benchmark rate twice, to bring it down to 4.25 per cent – and further cuts are expected.

“We see a change in approach on the part of the monetary policy council and a deepening conviction that there is a continued space for further cuts,” Mr Belka said, adding that the Polish financial supervision authority, the banking sector regulator, is also easing its lending rules to spur credit growth.

While the European Central Bank and the neighbouring Czech National Bank have run out of room to cut rates and are contemplating unconventional policies, Poland still has the luxury of using standard interest rate reductions to spur growth.

“We would like to retain what we think is very valuable, that our monetary policy is still conventional, that we do not have to move to ultra-low interest rate levels,” said Mr Belka, who also criticised the idea of pushing for even further budget cuts at a time of low interest rates as a way of spurring faster growth, calling it “intellectual dilettantism”.

While Polish growth is slowing, the country does not have any glaring imbalances; public and private sector debt is not excessive, the banking system is solid and unemployment, while growing, is not catastrophic.

“We aren't dancing with joy but I can say that this is just a `perfect slowdown'. We aren't seeing any kind of a collapse,” said Mr Belka, adding that a technical recession is “improbable” in the only EU country to have dodged such a contraction over two decades. “Of course 2013 will be difficult, but we think that during the year the economy will start to revive.”

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