Poland's monetary policy should remain cautious as a potential military conflict between the United States and Iraq may create additional upward pressure on Polish prices, a central bank member said last week.
Dariusz Rosati, one of 10 members of the Monetary Policy Council (RPP) - the central bank's interest rate-setting committee - reiterated the national bank's view that Poland's inflation outlook was benign in the near term, but said possible external price shocks could change the situation in the future.
"Inflation outlook for now is good," Rosati told public radio. "But we cannot rule out that this outlook will change in the case of an attack on Iraq, so we have to remain cautious."
Rosati's comments came just before the publication of Poland's inflation figure for August, which came in at a record low of 1.2% down from 1.3% in July, according to the Central Statistical Office (GUS). Analysts had expected a confirmation of no price pressure in the stalled economy and boosted market expectations of an imminent interest rate cut.
But analysts also said that uncertainty over future fuel prices due to concerns about possible crude supply disruptions should tension between the U.S. and Iraq grow, could keep the RPP from ordering a further reduction at its next meeting on Sept. 24-25.
The RPP more than halved the main market rate to 8% since it started an easing cycle early last year, adjusting Polish rates to fast falling inflation.
Rosati also said he was worried that the government's 2003 budget draft - approved last week - would seek spending cuts, necessary to curb the budget deficit, in much needed investments rather than non-performing social funds.
Finance Minister Grzegorz Kołodko pledged to narrow next year's deficit to below this year's zł. 40 billion ($9.5 billion), or 5.4% of gross domestic product. Rosati said that spending cuts would be necessary even given the upbeat economic growth forecast.
"It is obvious that some spending cuts will be required, and it would be best to seek them in some of the social funds, which are often malperforming," he said. "But it may be too difficult, and then the easiest choice, unfortunately, is investments."
The International Monetary Fund earlier this month also urged Poland to relocate some of the budget funds from the social agencies that are non-performing to infrastructure projects, which are seen as key investments as Poland nears European Union membership.
- Reuters
