Polish Central Bank Raises Rates

Poland's central bank raised its benchmark interest rate by quarter point to 5.25 percent yesterday, its fifth increase since April, to combat rising inflation, while the Federal Reserve has cut U.S. borrowing costs by 1.25 percentage points this month to prevent a recession in the world's largest economy. The European Central Bank has kept its main refinancing rate at 4 percent since June.



Poland's central bank is likely to continue to raise rates in the coming months given the need to cap wage-related inflationary pressures.



The Polish zloty rose the most in a week against the euro after the central bank decision. Poland's currency climbed to its highest level since Jan. 24 after policy makers lifted the seven-day reference rate to 5.25 percent. The zloty was also buoyed as a report showed the $339 billion eastern European economy expanded by its fastest pace in a decade last year, supporting the case for more rate increases.


Inflation will remain above its target of 2.5 percent plus or minus 1 percentage point, boosted by food and oil costs, the central bank forecast. Policy makers next decide on interest rates on Feb. 27.

Poland GDP 2007

Poland's economic growth accelerated at the fastest pace in a decade last year as rising employment and wages boosted profits and consumer spending. Gross domestic product expanded 6.5 percent last year, the central statistical office reported,The economy grew 6.2 percent in 2006.



Poland, which is the biggest European Union member in eastern Europe, is counting on accelerating economic growth to help living standards rise to western European levels. However there are conncerns that many years of below replacement fertility, heavy out migration of productive age workers and a rapidly ageing population may have placed a cap on the rate at which the economy can grow without seriously overheating, and despite rather high continuing levels of unemployment there are serious concerns about labour shortages.

The unemployment rate dropped to 11.4 percent in December from a record 20.7 percent in February 2003. Authorities now must grapple with allowing the expansion and keep inflation at bay. Investment rose 20.4 percent in 2007, while domestic demand gained 7.3 percent. Construction rose 15.6 percent and production increased 7.7 percent, the statistical office said in its preliminary estimate today.

At the same time, the proportion of Poles in legal employment increased by a record annual 5 percent in November, putting more money in people's pockets and boosting demand for housing. Construction ``remained one of the flywheels'' of Poland's economy, statistical office head Jozef Olenski said at a press conference today in Warsaw. We had better just hope that the wheel in question doesn't simply fly off its axis.

The Zloty and Polish Inflation 2007

The Polish zloty continues to rise against the euro on speculation the Polish central bank will keep raising interest rates to stem accelerating inflation. Poland's zloty rose against the euro again today after central bank monetary policy council member Jan Czekaj said it's ``more likely'' interest rates will be raised further to curb an expected acceleration in inflation. Czekaj's comments, made in an interview broadcast by TVN CNBC Biznes today, came after the finance ministry said inflation probably accelerated in December to 4 percent. Against the euro, the zloty rose to 3.6048 by 5:02 p.m. in Warsaw, from 3.6153 late yesterday. Poland's currency gained 6.1 percent versus its European counterpart last year, its biggest advance since 2005, as policy makers lifted borrowing costs during the year by 2 percentage points to 5 percent.




The Polish central bank kept its key rate unchanged at its last meeting on Dec. 19 after lifting the benchmark seven-day reference rate by a quarter of a percentage point four times earlier in the year.




The cost of manufactured goods in Poland's $339 billion economy rose an annual 2.6 percent in November, compared with 2 percent the month before, a government report showed last week, while net core inflation accelerated to 1.5 percent from 1.4 percent.

Polish central bank monetary policy council member Dariusz Filar said recently that he expects inflation to accelerate in 2008, and that it won't come close to the bank's mid-range target of 2.5 percent until in the first half of 2009, fueling speculation that policy makers will raise interest rates as early as next month.

"I fear that we have a period of rising inflation before us" he said in an interview with the Gazeta Prawna daily. The inflation rate may "find itself in the region of 4 percent" in the first quarter of next year, he said.

The inflation rate rose to 3.6 percent in November, above the bank's target range of 1.5 percent to 3.5 percent.




According to Filar, the economy may expand at ``around 5 to 6 percent'' in 2008, slowing from a projected 6.5 percent this year. Turbulence on the world markets will have little effect on Polish economic growth as it is ``mainly driven by internal demand,'' he said. We will see, although one thing is for sure, internal demand in Poland, and in particular construction demand are the key.



Wages, a major driver of consumption, grew an annual 12 percent in November. Earnings have been bolstered by an economy that has grown at 6 percent or more for seven quarters, and unemployment at its lowest in nine years.