Belka urges fiscal restraint as overheating fears rise
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Belka urges fiscal restraint as overheating fears rise

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Strong capital inflows mean that Poland will have to exercise strong fiscal discipline, central bank governor Marek Belka has warned

Poland will have to exercise fiscal discipline in order to stem strong portfolio inflows into the country, the governor of the country’s central bank has warned.

“We are OK with foreign direct investment, but the strong inflow of portfolio capital invested in debt instruments is a concern,” he said yesterday in Astana.

Poland, the only country in Europe to avoid recession last year, has continued to deliver good economic news this year, leading some to worry that portfolio inflows could be a harbinger of overheating.

“It’s not great news that the current account deficit could be 5% of GDP this year, and it’s being financed by portfolio flows,” said Neil Shearing, an economist at the consultancy Capital Economics in London.

Belka said fiscal discipline, which would reduce the supply of bonds, would be the best way of stemming inflows. “You can limit the issuance of debt instruments: so restructuring fiscal policy is the cure in the longer term.”

The other form of capital inflow that could be a concern was that which came via foreign owned banks. “Here, you have to consider prudential mechanisms,” he said.

Polish banks have shown a marked increase in their willingness to lend, adding to a string of good economic news from the largest new European Union member, justifying the central bank’s surprise decision to hike interest rates last week.

He voiced his concerns about inflows as the string of good economic news from Poland continued unbroken, with a survey of bank credit officers earlier this week showing that lenders were increasingly optimistic.

The survey by the Polish central showed that lenders in the country were easing up on lending restrictions that were imposed as global liquidity dried up over two years ago.

Around a quarter of banks eased lending policy for both property and consumer loans, while conditionality for granting loans to small and medium enterprises was relaxed in the case of long-term loans. Spreads on loans to enterprises and for mortgage lending also narrowed, and the maximum size of corporate loans also rose.

The news was particularly good in the corporate sector, where banks reported rising demand for loans as well as an easing in the standards banks retired to grant loans. Demand for lending in the consumer and mortgage sectors remained stagnant.

The central bank surprised markets earlier this month by deciding to raise interest rates by a quarter percentage point to 4.25% in response to inflation concerns.

The bank was responding to concerns that price inflation was threatening to run well ahead of its 2.5% cent annual target.

“First and foremost, the inflation is being driven by the January VAT rise as well as by increases in the price of food and energy,” Shearing said, forecasting that there would be one more rate hike followed by tightening from the autumn onwards.

But the numbers underline that Poland has so far been able to sustain its growth momentum even as the rest of the region only inches out of recession.

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