Poland's Central Bank Raises Interest Rates to 5.75%

Poland's central bank today raised its benchmark interest rate by a quarter of a percentage point to its highest level in three years in an attempt to stop inflation getting out of control. The Narodowy Bank Polski lifted the seven-day reference rate to 5.75 percent, the third consecutive increase and the seventh in the past 11 months.

The rate-setting Monetary Policy Council has so far failed in its bid to contain price growth after the inflation rate breached the upper end of its 1.5 percent to 3.5 percent target range in November and rose to a three-year high of 4.2 percent in February. Other statistics, including industrial output, retail sales and wages, have all boosted concern that inflation may well be set to accelerate further.

``The council sees inflation as more likely to remain above the target in the mid term and decided to raise key rates,'' the council said in a statement. ``The council will vigilantly observe wage growth and labor productivity. It will also monitor the exchange rate of the zloty and global economic trends.''

The zloty traded at 3.533 per euro at 3 p.m. in Warsaw, little changed from before the decision and down from 3.524 yesterday. Yield on the government's bond maturing in April 2012 was 6.139 percent, unchanged from just ahead of the announcement and up 3 basis points from yesterday.


The average corporate wage rose in February an annual 12.8 percent, the largest year on year monthly increase in almost eight years:




while industrial output growth, at 14.9 percent, was the highest in 14 months:



Todays retail sales data has also added to expectations that there may well now be further monetary policy tightening in the pipeline, since the statistics office reported that retail sales in February rose an annual 23.8 percent the highest in almost four years.



Poland's 625 billion euro economy expanded 6.5 percent last year, the fastest pace in a decade, and may have grown by about 6 percent in the first quarter of this year, according to recent estimates from Katarzyna Zajdel-Kurowska over at the Finance Ministry.

Polish Growth Forecast At 6 Percent in Q1 2008

Poland's economy may have grown about 6 percent in the first quarter of 2008, according to Deputy Finance Minister Katarzyna Zajdel-Kurowska in Warsaw today..

``Economic statistics for the first months confirm that Poland is resilient to the global economic slowdown,'' Zajdel- Kurowska she told a press conference in Warsaw today. The Polish economy expanded 6.1 percent in the fourth quarter of 2007.

Wage and employment growth are likely to boost the inflation rate and budget revenue, while the ministry doesn't expect this year's spending plan to be fully implemented, she said.




Poland's Monetary Policy Council has raised interest rates six times in the past 11 months on concern that wage growth, outpacing production, will increase labor costs and force companies to lift retail prices. The average corporate wage rose 12.8 percent last month, the fastest pace in eight years.



Zajdel- Kurowska forecast the average inflation rate would rise to at least 3.5 percent, above the government's forecast of 2.3 percent. The main threat to the inflation outlook stems from energy and food prices, as well as rising unit labor costs and potential zloty depreciation if the central bank should ever need to reduce interest rates.

Poland Industrial Output and Producer Prices February 2008

Poland's zloty rose against the euro again today following release of the industrial output data which seemed to suggest that economic growth quickened last month, giving the central bank more reason to raise interest rates. The zloty gained for a second day as producer prices jumped 3.2 percent, from 2.8 percent in January, and industrial output gained to an annual 14.9 percent, from 10.8 percent, the Warsaw- based Central Statistical Office said today. Month on month, output rose 1.6 percent, while the annual growth rate was the highest since January 2007.



Analysts now seem pretty convinced that Poland's central bank will raise its main rate a quarter-percentage point to 5.75 percent when it next meets on March 27. The central bank has raised its benchmark rate by 150 basis points since April to the current 5.5 percent rate. Poland's main interest rate is thus now 1.5 percentage points above the euro region's 4 percent benchmark and 325 basis points above the Federal Reserve's 2.25 percent target rate.



The zloty rose to 3.5375 per euro by 3:25 p.m. in Warsaw, from 3.5393 late yesterday. Poland's zloty climbed to a six-year high against the euro on February 28 after the central bank raised its main interest rate and said inflation may accelerate faster than its earlier forecast. Since then it has fallen back slightly.





But since August last year the zloty has rosen considerably, rising by 2.3 percent during February alone, making it the second-best performing emerging-market currency in Europe, after the Czech koruna.

The Future of Poland's Interest Rates

The future of Polands benchmark interest rate is a matter of some controversy at the present time. Poland's central bank raised its benchmark interest rate by a quarter point to 5.25 percent at its last rate setting meeting at the end of February, and this was its fifth increase since April 2007. The central bank is fighting a strong rearguard action in an attempt to combat Poland's steadily rising inflation. So while the Federal Reserve has been busy cutting U.S. borrowing costs in an attempt to fight off and salvage battle scarred bank balance sheets, and the European Central Bank has kept its main refinancing rate at 4 percent since June, Poland's rate has been on the up and up, raising the yield differential and with it the value of the zloty as investors come in to gain the extra yield on offer in what is seen as being a relatively stable economy.

Poland's zloty climbed to a six-year high against the euro at the end of last month after the central bank raised its main interest rate and said inflation may accelerate faster than its earlier forecast. The zloty in fact rose 2.3 percent advance in February, the most since October, ranking it as the second-best performer among 11 emerging-market currencies in Europe, the Middle East and Africa, after the Czech koruna. Since that time the zloty has dropped back slightly, but talk of more interest rate rises is only going to fire it up yet again. Piotr Wiesiolek, the newly appointed deputy governor of Poland's central bank, is well aware of this issue, and has been actively out and about in recent days stressing that he sees no need to ``intervene'' to weaken the zloty. Indeed Wiesiolek emphasised he sees "further room" for rate increases in Poland in an interview with the television station TVN CNBC Biznes earlier this month.

``February inflation is lower than expected, but still not as low as we would like it to be,'' Wiesiolek said. The ``cycle'' of rate increases may end within one year.

With the Monetary Policy Council due to meet on March 25-26, and with analysts generally forecasting another increase in borrowing costs by 25 basis points to 5.75 percent, not everyone is so naunchalant about the situation, and Stanislaw Owsiak - who is a voting member of the Monetary Policy Council - is quoted this morning as saying he saw a need for a pause in interest-rate increases to allow time to better evaluate the outlook for inflation after the bank raised borrowing costs six times in the past year.

Owsiak, who is among a total of 10 members on the rate-setting Monetary Policy Council, said he expected inflation to return to the central bank's target range of 1.5 percent to 3.5 percent at the turn of next year after it accelerated to 4.2 percent in February.



The zloty weakened to 3.5433 against the euro following Owsiak's comments (perhaps this was his intention) and traded at 3.5403 at 10:27 a.m. from 3.5429 late yesterday. The yield of the zero-coupon bond was at 6.32 percent.

Owsiak said he saw a ``great need'' for a joint effort by the central bank and the Finance Ministry to combat inflation, which was fuelled mainly by rising energy prices and accelerating wage growth.


He also said the central bank must not ignore the rate disparity between Poland, the U.S. and the euro zone. Poland's borrowing costs are currently 1.5 percentage points above the European Central Bank's benchmark and 2.5 percentage points higher than the Federal Reserve's.

``There is a discussion on how rate disparity impacts the zloty,'' Owsiak said. ``Excessive appreciation of the Polish currency would be harmful for the economy.''

Traders saw a 78 percent likelihood the Fed will cut its target rate by a full percentage point at today's meeting, futures on the Chicago Board of Trade showed. There is a 22 percent chance the rate will be lowered 1.25 points.

The zloty has gained 7.6 percent against the euro since the beginning of last year, rising to near a six-year high on Feb. 28 in the midst of fast economic growth and expectations the central bank will raise interest rates further. Owsiak said the strength of the currency was already hurting some exporters.

Poland Wages and Salaries Januuary 2008

Polish average corporate wages rose in February an annual rate 12.8 percent. This was the fastest rate of increase registered in almost eight years, adding to expectations the central bank will raise interest rates next week. Month on month wages rose 2.1 percent, according to data from the Central Statistical Office earlier today.



The quarterly average nominal hourly rate chart possibly gives a better idea of what is happening, as it irons out some of the monthly fluctuation.



Clearly a number of factors are at work here, but among them the fact that the labour market is steadily tightening, as employment rises:



and unemployment steadily falls:





Policy makers are considered to be likely to raise the interest rate by a quarter of a percentage point to 5.75 percent at the next meeting on March 25-26. If this expectation is fulfilled it will be the third rate increase this year as policy makers seek to slow inflation to the central bank's 2.5 percent target.

In February, the inflation rate rose to 4.2 percent and may start returning to the target at the end of next year, central bank Governor Slawomir Skrzypek said on March 11.



The Statistical Office also said employment in February grew 5.9 percent from February 2007 and increased 0.4 percent from January.

The zloty traded at 3.5474 per euro at 2:30 p.m. in Warsaw, little changed from earlier in the morning and down from 3.535 on Friday, but this change may have more to do with global conditions this morning than with domestic Polish data. Yield on the government's five-year bond rose 6 basis point to 6.316 percent.

Polish GDP Q4 2007

The Polish economy grew at a slower annual pace in the fourth quarter after domestic demand eased, giving policy makers room to hold off on raising interest rates.

Gross domestic product expanded 6.1 percent in the final three months of 2007, the Central Statistical Office in Warsaw said today. Fourth-quarter growth was the slowest last year and down from 6.4 percent in the third quarter.

Poland's economy is growing at a slower rate than the 6.9 percent expansion in the neighboring Czech Republic or the the 14.1 percent growth rate in Slovakia, but this may be rather reassuring than being perceived as a problem.



There seems to have been a significant slowdown in private consumption, but these consumption dynamics may well have been a one-off effect and in the first quarter we may well see private consumption return to its old higher level.

Deputy Finance Minister Katarzyna Zajdel-Kurowska recognised that the fourth-quarter data indicated that the pace of growth in consumption was slowing, attributing the phenomenon to the impact of accelerating inflation. She also suggested that the dynamics of gross fixed capital formation, which was up 18.5 percent year on year, "remained high".



Total domestic demand grew by 6.2 percent, while consumer demand increased 3.8 percent. Construction was up 8.8 percent and production by 7.9 percent.

Full-year GDP growth is estimated to have reached 6.5 percent in 2007, the fastest pace in a decade. The government predicts 5.5 percent growth for 2008.

The central bank's quarterly forecast which was also released today showed the inflation rate may rise to 4.7 percent after reaching a three- year high of 4.3 percent in January.