Polish Central Bank Raises Interest Rates To 5.5%

Poland's central bank raised its benchmark interest rate by a quarter of a percentage point today to 5.5 percent. The increase was the sixth in the past 10 months and the second this year.

The upward movement in Polish interest rates has so far failed to contain price growth after the inflation rate breached the top of the central bank 1.5 to 3.5 percent target range in November and rose to a three-year high of 4.3 percent in January. Recent rises in retail sales and wages have increased concerns that inflation may continue to rise and reach higher than previously expected levels, the council said in the statement which accompanied the decision.

Concerns are mouting that the Polish economy may now be overheating. The economy expanded 6.5 percent last year, the fastest pace in a decade. Retail sales where up at an annual 21 percent in January, while industrial output rose 10.8 percent. Employment grew last month at a record pace of 5.9 percent, while private sector wages have soared at a double digit rate in four of the previous six months.

According to the central bank forecast, the inflation rate this year may rise to 4.7 percent, up from the previous forecast of 3.5 percent, and may rise to 4.9 percent next year, even remaining as high as 4.8 percent in 2010. I would say that all of these numbers are subject to significant upside risk in the short term, since if the economy moves into overheating mode the possibility of a sharp rise in inflatio rates undoubtedly exists.



The central bank council also published their economic growth forecast, saying growth may be between 4.4 and 5.8 percent this year, while next year growth will be in the 3.5 to 6.1 percent range. Obviously the further forward we move the more the uncertainty over forecasts grows, and all we can realistically say at this point is that in the short term the risk on the growth forecast is an upside one, with the accompanying danger of overheating.

Council member Andrzej Slawinski is quoted as saying that any economic slowdown abroad should have only a "limited effect on Poland", and in the short term I am inclined to agree. Obviously, apart from what is happening in Germany, Poland may be most vulnerable to the turn of events in the UK and Ireland, where large numbers of migrant workers are employed and from where large quantities of remittances are sent home every month.


The zloty gained 0.2 percent to 3.5284 per euro by 5:43 p.m. in Warsaw on the decision, up from 3.5352 yesterday, when it traded at at one point at 3.5230, its highest level since January 2002.

Poland Retail Sales January 2008

Polish retail sales rose an annual 20.9 percent in January, the highest in almost four years, raising expectations that central bank policy makers will raise borrowing costs when they meet later this week.

Sales growth, compared with the same month a year earlier, was the fastest since April 2004, the Central Statistical Office reported today, while compared with the year on year growth rate of 12.4% in December the rate of increase was up sharply.



Today's report may tip the balance for the central bank's rate-setting council, which meets to discuss interest rates on Feb. 27. Higher-than-expected industrial output last week increased speculation that the bank will raise the 5.25 percent benchmark interest rate for the sixth time in 10 months. The zloty traded at 3.563 per euro at 10:55 a.m. in Warsaw, little changed from earlier in the morning and Friday's close. The yield on the government's bond maturing in April 2012 rose 3 basis points to 6.138 percent from Friday.

Cars sales soared an annual 42 percent in January, leading retail sales of all products and followed by an almost 30 percent gain in sales of textiles and footwear. January sales of food rose 12.5 percent on the year after falling 0.3 percent in December.

The central bank-led Monetary Policy Council starts its two- day meeting tomorrow. The council lifted the key interest rate to 5.25 percent last month. The rate was record-low 4 percent in April last year when the council started to its series of rate increases.