Narrow the focus
By : Jeffrey Sparshott
The government should focus on structural economic reforms and not look to lower interest rates as a solution to slowing growth and high unemployment, the Monetary Policy Council (RPP) said last week.
The RPP at its monthly meeting held interest rates in check, citing worries about a high budget deficit and inflationary pressure during the next few months. The Solidarity Election Action (AWS)-led government had been pressuring the RPP to cut rates, but the independent rate-setting council did not act. It said rate cuts that are too deep or come too quickly will force up inflation and not achieve positive long-term results.
"...(A)ctions intended to boost employment and achieve higher economic growth should focus on necessary structural reforms," the RPP said. "These should include elimination of barriers to starting businesses as well as privatization, labor market and public finance reform."
Recent signals from the economy are mixed, with unemployment the gravest concern. Some 2.9 million Poles were registered as unemployed at the end of March, a rate of 15.9%, according to the Central Statistical Office (GUS), up slightly from the previous month. Meanwhile, the government is scaling back economic growth forecasts below earlier predictions. Economy Minister Janusz Steinhoff called a press conference on the opening day of the RPP's meeting to review the country's first-quarter economic data. At the meeting he said the government's growth forecasts count on interest rate cuts.
"I hope that the RPP will lower the interest rates," Steinhoff said. "All indicators that would enable this decision are apparent."
The government is deregulating the energy market, allowing duty-free fuel imports and trying to keep down food prices, Steinhoff said. He did not specify the size or timing of the cuts needed to meet government goals. During the week, Finance Minister Jaroslaw Bauc joined the chorus in emphasizing that further interest rate cuts would be reasonable.
The domestic product (GDP) should grow 4% in 2001, Steinhoff said, downgrading an earlier projection of 4.5% that is included in the budget plan. The Finance Ministry offered a slightly lower figure in a separate statement. The economy grew 2.3% in the first quarter of 2001, he said, slower than the 2.4% growth in the last quarter of 2000, but the pace is expected to pick up.
"The state of the Polish economy is far from recession," he said. Still, the slowing growth and high unemployment concern the government, especially prior to this fall's elections.
The RPP's decision to leave interest rates alone was in line with market expectations. The 28-day money market rate is 17%, the rediscount rate is 19.5% and the Lombard lending rate is 21%.
"We expect that inflation will stop falling in April and it may even cross to 6.2-6.3%," said Iwona Pugacewicz-Kowalska, senior macroeconomist with CDM Pekao Securities. "This is the main reason not to cut rates too early.
"Another problem connected with the current budget focus and forecast is that the deficit will be worse than the government predicts," she said. "This is another important reason not to cut interest rates because an amendment to the budget law will be necessary."
The government reached 73% of the planned gap for 2001 at the end of March and the situation is expected to deteriorate further in April, the RPP said. Inflation was 6.2% at the end of March, well within the RPP's 6-8% target.
Regarding the government's economic forecasts, Pugacewicz-Kowalska said 3.7% economic growth is more realistic.
The European Union issued a report last week predicting 4.3% GDP growth in 2001 and 4.6% growth in 2002, as well as year-end inflation at 6.6%, "since the dynamics of food prices are likely to become less favorable and supply shocks cannot be ruled out."
