OECD says Poland could cut rates further without boosting inflation

The OECD said Poland could cut interest rates further without boosting inflation.

In its annual report on the Polish economy, the OECD noted that several analysts have criticised monetary policy as too cautious, with inflation frequently undershooting the central bank's target range.

It acknowledged that inflation below the bottom end of the National Bank of Poland's target range of 1.5 to 3.5 pct 'may be a sign that monetary conditions have been too tight'.

The central bank's monetary tightening 'most likely delayed a rebound from the growth slowdown' in Poland in late 2004 and the first half of 2005.

'Monetary conditions at the beginning of 2006 still appeared to be relatively tight, although uncertainty as to the fiscal stance after the election period, volatile energy prices, and uncertainty as to the transmission of the past energy price increases can explain the bank's cautious approach to further easing,' it said.

'But the forecasts in the April inflation report suggest that further easing would be unlikely to put price stability at risk,' it said.

The OECD said exchange rate movements have had a big effect on monetary conditions in Poland, which has yet to set a target date for entering the euro zone.

'Joining the euro area would reduce this source of volatility and uncertainty,' it said.

It assessed the likely cost of delaying euro zone entry as small if monetary policy is sound.

It called on Poland to use the extra time to improve flexibility in product and labour markets and to put public finances in order.

The OECD said Poland's fiscal policy may also be a key factor determining the room for manoeuvre of monetary policy.

'The current level of the general government deficit is too high, and the government's plans as described in its convergence programme are not very ambitious,' it said.

'General government debt is not excessively high -- at the end of 2005 it was about 48 pct of GDP according to national definitions -- but it is increasing,' it said.
Source: www.forbes.com