Poland’s higher interest rates will result in stronger zloty

March 19, 2007 Ela Pawełek-Lubera

A growing interest rate disparity with the EU will continue to strengthen the zloty and recent events from the U.S. suggesting further rate cuts there only confirm the zloty’s appreciation will last, central bank vice-president Piotr Wiesiolek told PAP in an interview.

“One of the reasons for the zloty’s strengthening is the growing interest rate disparity between Poland, the euro zone and the U.S.,”
Wiesiolek said. “If the disparity continues to grow, and taking into account the recent events from the U.S. this is what will happen, we can expect that the process of the zloty’s appreciation will last.”

The persistence of the zloty’s strengthening will to a large extent depend on the course of global events.

“The depth of the U.S. crisis and the extent of its influence first on the European economy and later on Poland’s will play an enormous role here,” he said. “Poland, naturally, will experience this slowdown.”

Poland’s competitiveness could weaken not only due to zloty’s appreciation but also due to labour costs, Wiesiolek believes. This, in turn, could contribute to an economic slowdown.

“At the moment competitiveness of the Polish economy is lower not only because of the stronger zloty, but also due to labor costs,” Wiesiolek said. “I believe that there is a risk of an economic slowdown due to external as well as internal factors.”

Should the Monetary Policy Council choose to hike rates, it will influence Poland’s GDP growth.

“If the Monetary Policy Council continues to hike interest rates, it has to have some impact on economic development,” Wiesiolek said.

Basking on inflation forecasts, you cannot expect its decline in the near term, according to Wiesiolek.

“In the short-term growing food and fuel prices will have large influence over the level of inlfation, which may hinder a quick return to the inflation target,” Wiesiolek said.

Wiesiolek refused to speculate when inflation could be brought back to the central bank’s target.

Wiesiolek believes Poland could be ready to adopt the euro in 2012, as recently suggested by the Finance Ministry.

“I believe that the Finance Ministry’s announcements in the context of Poland’s euro zone entry are realistic, though we should be aware the situation is dynamically changing,” Wiesiolek said. “If the ministry confirms this date and prepares the agenda for euro zone entry, the NBP will adjust to it and will perform all tasks to conclude the entry successfully.”

source: paiz.gov.pl