Above-target inflation, external volatility and a sharply rising currency are delaying Poland’s decision on when to join the ERM-II pre-euro currency arrangement, the country’s central bank governor has said. “We should [...] get more knowledge of the recent financial turmoil. This does not mean we have to wait and wait, but at this moment there are too many question marks, and few answers,” National Bank of Poland (NBP) governor Slawomir Skrzypek told Emerging Markets.
The ERM-II is the requirement to lock the national currency into a narrow exchange-rate band against the euro for at least two years before entering the common currency – which analysts expect Poland to do by 2012. Poland’s healthy fundamentals are strengthening the currency, Skrzypek said; he believes that the economy needs time to get used to rapid currency gains. The zloty has appreciated by 30% since EU entry in 2004. Slowing global growth and volatile international capital flows open the possibility of exchange rate deviations, so policymakers are waiting for the currency to be “stabilized” before a decision on ERM-II entry is made.
The governor was quick to stress that the decision on entry is for the Polish government to make, but that it would be easier at the end of the year. Nevertheless, “technically speaking we can start process with only two weeks notice”. Soaring inflation has driven monetary policy makers in emerging markets to use currency appreciation to ease price pressures, but this would be lost in any fixed exchange rate system.
Skrzypek denied this was a concern and said that a “good fiscal and monetary policy mix” would help ensure a stable monetary supply in the economy going forward.
On May 7, Slovakia became the first former communist country to get the green light for euro adoption, after two years in the ERM-II. But in other transitional economies that have chained their currencies to the euro, such as Lithuania and Bulgaria, inflation has spiralled out of control. Skrzypek said such challenges to euro convergence meant that the two-year period in the ERM-II is “too long”.
Skrzypek explained that Poland’s economic growth would moderate this year after its 6.5% expansion in 2007, while end of year inflation could remain above the NBP’s 2.5%. “Domestic consumption and investments are the main drivers of GDP growth, and FDI is still strong.” Poland’s economy is “in good condition” compared to others in the region. “But 70% of exports are to the euro zone and the slowdown in the region will pass through the economy in the second half of the year,” he concluded.
The central bank has been rocked by four resignations since Skrzypek became governor in January 2007. The latest was deputy governor Jerzy Pruski’s departure, in January this year, over the governor’s decision to end the practice of management board members advising the monetary policy council on rate-setting decisions.