|
The following OECD assessment and recommendations summarise Chapter 2 of the Economic Survey of Poland 2006 published on 28 June 2006.
Contents
Are monetary and fiscal policies on track?
Monetary policy has been criticised for excessive caution, as inflation has frequently undershot its target range. The National Bank of Poland (NBP) tightened policy in mid-2004, in a justifiable response to a surge in inflation; this prompt action, permitted by its independence and determined by its price stability mandate, played a part in preventing any second round effects from the inflation surge. Subsequently, the NBP maintained official rates at their higher level for several months after quarter-on-quarter inflation had subsided in late 2004 and waited until early 2006 before further cutting rates, although headline inflation was declining and core inflation low. The NBP was probably influenced partly by consumers’ inflation expectations, which tend to closely follow historical inflation with little relation to future outcomes. The central bank should put more weight on genuine forward looking indicators, including its own inflation forecasts.
The mandate, and even the independence, of the central bank has been under some threat recently. The government should reaffirm the independence of the National Bank, and the autonomy of any new financial market supervision agency should also be clearly guaranteed. The credibility of monetary policy would also benefit from explicit government endorsement of the NBP’s current objective of targeting inflation at the mid point of the 1.5 to 3.5% range.
However, inflation below the bottom end of this range may be a sign that monetary conditions have been too tight. While monetary reflation is not the answer to Poland’s growth and employment problems, if inflation were to remain persistently below euro-area rates this would be likely to restrict output and employment unnecessarily. The NBP should ensure symmetry in its approach to inflation targeting and be willing to probe the limits of the economy’s supply responsiveness by cutting interest rates when inflation is below the target range, even if there is some probability that it may rise above 2.5% in two years’ time.
Movements in the exchange rate have had an important effect on monetary conditions. Joining the euro area would reduce this source of volatility and uncertainty. After three years of depreciation, the economy nevertheless weathered substantial appreciation in 2004-05, which accentuated the relatively tight monetary policy settings. EU membership requires eventual adoption of the euro, which has to be preceded by participation in the exchange rate mechanism (ERM II), but the current government is reluctant to commit to any target date for entry. With sound monetary policy, the cost of delay maybe small, mainly in the form of an additional currency risk premium. Yet, a delay gives the government more time to improve flexibility in product and labour markets and put public finances on a sustainable footing; it is important that this time should not be squandered by putting off these necessary reforms.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of the Poland 2006 is available from:
-
SourceOECD for subscribing institutions and many libraries
-
-
OLISnet, under "Publication Locator", for government officials with accounts (suscribe)
-
Additional information
For further information please contact the Poland Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Paul O'Brien and Stéphanie Jamet under the supervision of Peter Jarrett.
|
