Poland To Consider Interbank Guarantees As The Forex Lending Crisis Deepens

Well, it's been a few weeks now since I posted on this blog, but I have a feeling that this situation may now be about to change. Pressure on Poland's economy is mounting as the clutches of the global credit crunch start to make their grasp and reach felt.




Stocks In Decline

Central European stocks declined for a fourth consecutive fourth day today, with indexes in Vienna and Budapest heading for record monthly drops, on mounting concern that the global financial crisis is going to have a severe impact on economic growth in the region and that the IMF sponsored rescue packages in Hungary and Ukraine won't avoid the worst of the damage. Concern is also mounting that the problem will affect the whole region, and hence the mounting pressure on Poland's rather stronger economy. If Poland falls, god help the rest of them.

Erste Group Bank AG slid to the lowest level in more than five years while Raiffeisen International Bank Holding AG, which operates in Russia and the Ukraine, plunged after mounting financial chaos forced Ukraine to seek help from the IMF.

Poland's WIG20 Index added 2.2 percent today following a 5.9% fall on Friday. The MSCI Barra Core Index (which is a measure of comparative equity values) is down 48% so far this month, and 61.24% over the last three months.

The Polish government has also announced today that Poland is considering guaranteeing interbank transactions, according to Deputy Prime Minister Waldemar Pawlak speaking on Polish public radio this (Monday) morning. Pawlak said that the government is examining the possibility of taking bank shares as collateral for the guarantees. Foreign investors in Polish banks have applied policies that are too strict in Poland, though credit problems have not affected Polish banks, Pawlak said .

According to the draft of a new law which is set to go before cabinet tomorrow (Tuesday) Poland's government will be empowered to guarantee commercial banks loans from the central bank and other lenders on the interbank markets. The government will also be able to lend cash and state securities to banks.

Poland's central bank injected 9.3 billion zlotys ($3.42 billion) of liquidity into the banking sector last week, in the form of 14-day repos. The decision was taken in order to try to ease strains on the Polish money market. The bank said it had accepted all bids worth 9.267 billion zlotys, at an average rate of 6.16 percent, 16 basis points above the main policy rate, with state bonds used as collateral. The minimum rate at which the central bank lent money to banks was 6.15 percent, while the maximum at 6.25 percent.

Poland's deputy prime minister also warned that local bank capital was at risk of capital being transferred to their financially-strapped foreign owners and urged the country's watchdog to stay vigilant.

"There is a risk that the capital will be transferred from Polish institutions to their parents," Waldemar Pawlak, who is also the economy minister and heads the governing coalition's junior party, was quoted as saying by PAP newswire.

The Financial Oversight Commission (KNF) has asked banks domiciled in Poland to report all transactions with their foreign owners daily. In a newspaper interview last week, the head of the KNF, Stanislaw Kluza, said the risk of capital transfers was very low, however, because Polish banks, with $284 billion in total assets, were too small to rescue large players in Europe and the United States. This is evidently true, but some of these bank are now under great pressure to avoid additional exposure in the east, and movement of funds can equally correspond to this strategy.

Foreign financial groups, among them Italy's UniCredit, the Dutch ING Groep, and KBC Group NV, Belgium's biggest bank and insurer by market value (all of whom are struggling with major problems at the present time), control two-thirds of the Polish banking sector after buying stakes in local lenders during the banking sector privatisation of the 1990s.


Polish lenders have been especially hurt in recent weeks by concerns over their ability to obtain foreign currency through interbank markets and worries about the fate of their foreign parents. Executives at some Polish banks have urged the government to consider introducing guarantees after the central bank's moves to boost liquidity on the interbank market, including foreign exchange swaps, failed to boost confidence between lenders. The financial watchdog KNF said on Saturday that Poland should think about measures to boost the Swiss franc positions of Polish banks, along with guarantees of interbank transactions or an eventual "institutionalisation" of the interbank market. But the regulator, the government and central bank insist Polish banks remain solvent and enjoy "over-liquidity."

Many of Poland's banks, like other lenders in the region, have been forced to introduce severe curbs on mortgages in Swiss francs due to pressure on their own liquidity and balance sheets. Such lending had become popular in Poland in recent months due to lower interest rates available from Switzerland and what was once favourable exchange rate.

Millennium BIGW.WA and PKO BP PKOB.WA, two of Poland's top home loan lenders, have gone so far as to announce that they were going to tighten rules for new mortgages due to the rising cost of money and fears that global financial nervousness may lead to much slower economic growth in Poland. Millennium Chief Executive Boguslaw Kott said last week that the group - which is Poland's third-biggest mortgage lender would ask for a 35 percent downpayment for popular Swiss francs-denominated home loans, a move which is likely to put a sharp brake on the growth of its mortgage portfolio.

PKO, Poland's largest mortgage lender, also confirmed it would ask new clients to put up 20 percent of the value of property when borrowing in francs. Millennium, which is controlled by Portugal's Millennium bcp, will now also require customers to cover 20 percent of investment when borrowing in Polish zlotys. Both banks had previously been offering mortgages equal to the entire value of the new home (100 LtV). Basically, what the hell these people thought they were doing by continuing to lend at 100% LtV after we have seen all that has happened in the US, and that is now happening in the UK and Spain is totally beyond "my ken", it really is.

Chief Executive Boguslaw Kott described the move as a precautionary one, and said it did not reflect any liquidity problems, adding that it was now more difficult to get Swiss francs on the interbank market. Marek Juras, head of research at BZ WBK brokerage is quoted as saying: "At times like these it is more important for banks to take care of their liquidity than drive their sales even higher." He estimated that for some lenders this would translate into a drop in new mortgages by between one-third and one-half.

The two market leaders join other smaller lenders, which in recent days moved to raise the bar for mortgage lending in foreign currencies as banks become more conservative and try to lure more cash on deposits by offering even higher yields. Mortgage adviser Expander said Getin's DomBank and Santander and GE Money had tightened their lending requirements. Many banks have also boosted margins on their mortgages in the past two weeks.

The Polish mortgage market has expanded rapidly since 2003, driven by economic growth and soaring wages, with annual growth exceeding 40 percent in the first half of this year. Large numbers of central and Eastern European housebuyers hold loans in foreign currencies, especially Swiss francs.

Most major Austrian banks, including UniCredit's Bank Austria, Erste Group Bank and cooperative Raiffeisen have now completely stopped lending to Polish domestic retail customers in foreign currencies.


After a meeting with economic advisers President Kaczynski advised Poles to keep faith in the zloty as the currency suffered further setbacks on the markets on Friday. Kaczynski recommended that loans should be taken in zlotys, not foreign currencies in order to avoid losing money on currency exchange.

"The depreciation of the zloty, which has its good sides for exports, boosts
mortgage loan installments for those who took them especially in the Swiss
franc. This may, however, be a lesson to us all to take loans in the Polish
currency. Considering low inflation, this gives the best results," Polish
President Lech Kaczynski told a press conference last Friday.

Seventy percent of the Polish banking sector is owned by foreign banks leading to concern that the impact of the general crisis in the banking sector will be felt in Poland. On Tuesday, Polish business Daily, Gazeta Prawna wrote, "The global financial crisis may cause large shifts in the Polish banking sector, AIG Bank Polska will soon be sold and there has been speculation that Fortis, Dominet, Citi Handlowy and even Bank Pekao may change hands."

Sell off speculation has surrounded the Italian owned Pekao bank over the last two weeks. It was subject to a 20 percent share price decrease in October prompting concerns that owner UniCredit may have been considering selling of all its Central and Eastern European assets. This has since failed to materialize but shows the current lack of faith surrounding the Polish banking sector.

Slawomir Skrzypek, president of The National Bank of Poland stated it had no intention of stepping in to help the zloty as it continues to weaken on the foreign currency market in a statement to reporters on Friday.


The sale of apartments in Poland has dropped by 70 percent in comparison to the same time last year, showing that the credit crunch is beginning to bite in Poland. The tightening of lending policies by banks has caused demand to fall and though prices are decreasing by 10 to 20 percent in some areas, buyers are looking for smaller flats, or withdrawing from the transaction altogether. The financial crisis has also influenced the situation of those clients who wanted to buy apartments without needing to get a mortgage, the number of which is declining due to losses on the stock market, says Gazeta Prawna.

Polish banks are to crack down on credit lending for housing loans after Poland’s financial regulator asked them to get tougher on lending practices. Millennium bank is one of the first high street banks to react and will now expect customers to cover 35% of the loan if they borrow in a foreign currency or 20% if borrowing in Polish zloty. The move is thought to be a precautionary one and not an indication of any liquidity problems, according to CEO Boguslaw Kott who told a news conference on Tuesday, “The decision practically blocks an increase of our mortgage portfolio.” He also told reporters that Swiss francs are harder to come by on the interbank market. Millennium Bank has been a dominant force in the Polish housing lending market with 80% of its mortgages being in Swiss Francs. This reflects a trend across Central and Eastern Europe where many house buyers have loans in either Swiss or other foreign currencies.

PKO BP, another major Polish mortgage lender, has joined Millennium in giving credits up to 80% of the value of the real estate. Fears that the Polish housing market could suffer similar repercussions to that of some western banks are as yet premature although the move does indicate a degree of uncertainty on behalf of the lending sector’s big hitters.

"We are extending between 35 and 60 million zlotys worth of mortgages each day, the vast majority of those in Swiss francs." Mariusz Grendowicz Head of BRE Bank BREP.WA "To fund our growth in mortgages, we were the only bank to the best of my knowledge that was using not swaps, which were the cheapest alternative, but actually taking a three- to four-year loan in Swiss francs to fund the book,"

The impact of the seize up in Swiss Franc housing loans is hard to guage at this point, although all the indications are that it will be serious. Foreign currency lending has not been such an important phenomenon in Poland as it has been in other CEE countries, but its weight has been growing in the last 18 months or so (see chart below).

The role of forex lending is clearly more important in housing loans than in general lending (see chart below).

One of the reasons for the recent uptick in Swiss Franc lending has been the monetary tightening cycle initiated by the central bank (see chart below), which made the cheaper interest rates available in CHF more attractive even though there was an evident currency risk involved.



If we look at the next chart the year on year rate of increase in the forex loans (the Polish central bank don't distinguish in their data between CHF and Euro, but all the anecdotal evidence cited above points to a significant role for the CHF, and especially given the role of Austrian banks were this type of lending has been commonplace.




The big problem is really that the CHF is a "carry trade" currency, and carry currencies have a strong tendency to shoot up in value as risk sentiment retreats, quite simply because people all try to liquidate their positions at the same time. Hence carry currencies have a kind of "pro-cyclical" role, adding to the boom during the good times, and making the bad times even worse. Which would be one very good reason why if you really do want an fx mortgage, using a currency other than a carry one would be a good idea. Obviously those who have euro denominated mortgages - while not being immune from the present problems (see the Baltics) - are less exposed, since the movements in the relative value of the euro tend to be in the opposite direction to those of the CHF and the Japanese yen.




Where Does All This Leave Us?


Well obviously Polish GDP growth is now set to slow quite dramatically. At this point just how dramatically is hard to see. Credit Suisse Group recently cut its forecast for Polish economic growth next year, predicting that the global financial crisis will hurt consumption and investment.




Credit Suisse said Poland's gross domestic product will rise by less than 4 percent in 2009, compared with the 4.4 percent rate it had previously forecast, according to a note to clients last week. The revision, amid rising aversion to risk in emerging markets, pushed the zloty to a two-year low against the euro. I think, basically, even Credit Suisse are being over optimistic at this point, although I think we need to see some real economy data before putting numbers on just how over-optimistic they may be.

Poland's `` private consumption and investment should fall further than we had anticipated due to our expectations of an increasingly restrictive credit environment in 2009,'' Jacqueline Madu, an emerging-markets research analyst at Credit Suisse in London, wrote in the note.

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One of the first areas where we should expect this crunch to be felt is in construction activity itself. There is no doubt that Poland has been "enjoying" the fruits of a construction boom since the second half of 2006. It seems to have come in two "waves" if we look at the chart below, with the first wave being much stronger than the second one.

If we actually look at the level of the seasonally adjusted index, then the steep increases in the levels of construction output become apparent. We should also notice how since about April the level has stopped rising, and this seems to suggest that the expansion in the industry had been slowing even before the latest credit shock. Be ready for this to be followed by a sharp slowdown in the months to come.

If we look at the chart for year on year industrial activity, then it is clear that the expansion in output has been fading for months now - not a good sign, not good at all, since it means that there is little underlying stability to resist the knock. The thing is running out of energy.

This becomes evn clearer when we look at the seasonally adjusted index, since it is pretty clear to see that industrial output went into decline at the end of last year, killed off in part by a high zloty, and in part by excess internal wage and cost push inflation.

Poland's Central Bank Leaves Rate Unchanged

Poland's central bank left its benchmark interest rate unchanged for a second month as it assesses whether eight increases in the past 16 months have been enough to keep inflation within the limits it requires. The Narodowy Bank Polski kept its seven-day reference rate unchanged at 6 percent this week, although it did stress that further monetary tightening may be needed to bring inflation down to the target.



Slowing industrial output and retail sales indicate economic growth is itself slowing, and the bank takes the view that this, and the recent decline in global oil prices should reduce pressure on inflation after consumer prices rose at a rate of 4.8 percent in July, the highest level in eight years.

The bank said today that recent data showed the economy was gradually slowing while wage growth still remained strong. The central bank expect the inflation rate to stay above their 1.5-3.5 percent target range in the coming months, and indeed they have now been struggling for some 10 months get the rate down to their 2.5 percent target midpoint.

Polish Wages Continue To Rise Strongly In July

Polish average corporate wages rose more than 10 percent for a seventh consecutive month in July, suggesting that interest rates will be raised in the future. Wages rose an annual 11.6 percent to 3,229 zloty ($1,425), compared with a 12 percent rate in June, according to the Central Statistical Office today. Wage growth has been the main gauge of inflationary pressure by the Narodowy Bank Polski, which has so sar boosted its benchmark rate eight times since April last year, to the current rate of 6 percent.




Employment was up 4.7 percent from a year in July, and rose 0.2 percent on the month. Unemployment is thought to have fallen to 9.4% in July, down from June's 9.6%. Poland's inflation rate rose in July close to a seven-year high as accelerating wage growth spurred consumer demand. The annual rate rose for a third consecutive month to 4.8 percent from 4.6 percent in June.




The inflation rate may rise in August to as high as 5.1 percent, according to the central bank forecast.

Where Now for CEE and Baltic Currencies?

By Claus Vistesen: Copenhagen

Ever since the illusive credit turmoil began sentiment in the market place has been fickle and essentially, like the assets of which it consists, volatile. We started off with an adamant focus on downside risks to growth which then turned into a focus and fear of inflation. Now, as the cyclical data has turned for the worse in Europe and many places in Asia the focus seems to be reverting to growth. Now, I won't go into the whole decoupling v recoupling discussion at this point since I think that this dichotomy is a false one. It never was about de-coupling à la traditionelle but moreso about two interrelated points. The first would be the extent to which the world already has decoupled from the US in the sense that a key group of emerging economies are now set to ascend in economic prowess. The second would be the extent to which the de-coupling thesis always built on a fallacy. The main point would be that the main fault line of slowdown was observed across economies with external deficits; something which, I am sure most will agree, is sure to impact surplus economies too.

Now, that does not completely let the ECB off the hook since by maintaining a focus on inflation it also assumed the role, if only temporary, of the new anchor in a re-wamped version of Bretton Woods II as the Euro ascended to new highs. This bet on global re-balancing was always going to end in tears and in this light the Eurozone could not decouple from the US; that much, I think, is true.

The key issue here however, as I have argued time and time again is represented in two crucial interlocked questions which together form a key structural trend in the global economy. One is what happens when the surplus economies slow down and there is not sufficient demand to pull the economy back up? Demographics and a high median age are key variables to watch in this regard. The second question is the extent to which hitherto deficit nations can turn the boat around and increase savings (i.e. rely more on exports) and what it will mean for global capital flows when they begin this process?

In the context of the CEE economies the themes above are also present. In a recent note I detailed the change in sentiment from growth to inflation and what it might mean for Eastern Europe's economies and their respective currencies. The key situation as I sketched it was one of a dilemma.

On the one hand, the rampant inflation levels suggest that the exchange rate be loosened to allow appreciation and thus pour water on the roaring inflation bonfire. On the other hand however the Baltics, as well as many other CEE countries, are saddled with extensive external deficits financed by consumer and business credit denominated in Euros. It is not difficult to see that this represents a regular vice from which it will be very difficult to escape since as long as the peg remains deflation seems the only painful alternative as a mean of correcting.

(...)

Another point which is specifically tied to Eastern Europe is that if domestic nominal interest rate increase to keep up with inflation rates it will have a strong substitution effects towards Euro denominated loans. This can become a dangerous cocktail should the tide turn against the currencies.

Now that the focus seems to be changing back again it appears to be a good time to revisit the situation

Within this global nexus of what exactly to do with inflation relative to growth, many Eastern European economies has so far opted to go for inflation by raising interest rates. At an initial glance this seems quite reasonable and in many ways the CEE central banks merely latched on to market sentiment and expectations that many emerging economies would seek to use nominal appreciation as a tool to flush out inflation.

Consequently we have seen how both Ukraine and Hungary have chosen to loosen the peg to the Euro as well as other floating currencies in Eastern Europe have seen their yield advantage increase in an attempt to flush out inflation. This has not been without problems though or more specifically it is not clear that an appreciation of the currency is all for the good. Two points here would seem particularly important. One is the simple question of whether in fact an appreciation is deflationary in a world where capital flows, and in particular the hot kind, act strongly on yield. However, another point would be specifically tied to the situation in Eastern Europe. As such, nominal appreciation of the currency also increases the purchasing power which is not what many CEE economies need at the present time as they stand before the task of correcting a rather large external balance. Moreover, rising domestic interest rates will increase and exacerbate the credit channel by which loans denominated in Euros and Swiss francs become more attractive. I have shown this to be true, for example, in the context of Lithuania. The important thing to do note here would what would happen to the servicing of these liabilities should the domestic currencies depreciate.

What happens next then? Or more concretely, even though CEE currencies, in general, have enjoyed a rally on the back of market expectations of nominal appreciation fed by hawkish central banks what happens if and when central banks reverese course?

An initial warning shot across the bow was handed to us as the governor of the Czech central bank mused that he might lower rates come next meeting due to the strenght of the Koruna and the subsequent effect on exports. Also Poland recently opted to abandon the hawkish stance as rates were kept steady. In light of this event Macro Man managed, as ever, to hit the proverbial nail on the head.

There is little more bearish for a currency these days than abandoning the inflation fight in a pursuit of growth; this is particularly the case when the market is heavily positioned the other way.

This is exactly the issue which now confronts many Eastern European economies. What to do as growth visibly tanks at one at the same time as inflation stays high. One thing here would be for the central banks to hold their raising cycle which in itself should ease the pace of appreciation but what if they need to lower rates.




Now the numbers above do not, in themselves tell anything remotely interesting. For one, the difference between the economies are quite big. For example the Czech Republic has been able to gain, with a comparatively low interest rate, currency appreciation which has actually helped the external balance in so far as it has made imports cheaper. Obviously, at this point the benign effect on the trade balance is just as much down to decreasing domestic demand as the value shield of a dear currency. On the other hand, if we consider especially Ukraine, Romania, and Hungary the price has been dearer and the subsequent effect on inflation less pronounced. One could always argue that the situation would have been much worse, but one thing is certain; the ensuing loss of competitiveness has not been compensated for with a decrease in inflation. And one has to wonder whether pushing nominal interest rates ever higher would be a sound solution.

The key here is that these high interest rates carry with them a high lock-in premium which makes it difficult to reduce them without causing substantial pain to the currency. Add to this that as long as interest rates stay in this territory the incentive to borrow in foreign currency remains very appealing. In fact, the incentive structure here is quite disruptive as many of these economies have higher rates on domestic currency deposits and lower rates on foreign credit. This incites consumers and companies to place their deposits in local currency while funding themselves in foreign currency. Finally, there is of course the more standard economics 1-0-1 point that whatever nominal rate is ascribed to a currency and an economy the latter needs to be able to provide the structural demand for which to satisfy the yield. Otherwise you just pour more gasoline on an already raging bonfire.

Obviously, as long as the local currency remains strong and on an upwards march or the trading band is kept in place the show goes on. But the longer this structure lingers the more difficult it will be to break free; and break free they must since I am quite sure that Eurozone membership is off, for the immediate future at least.

Another more hard hitting point would simply be that whatever growth momentum these economies had going into 2008 it is now steadily levelling off. Now, these economies need to rebalance their external accounts at the same time as they labour under the yoke of slowing growth, high interest rates which are difficult to reduce and/or a quasi fixed exchange rate to the Euro. Can you feel the chilling cold of deflation blowing across the Urals? I can.

Basically, the past years' rapid process of nominal convergence will now need to be kicked into reverse, since it is quite obvious that many CEE economies have been riding a blade too tough.

Be Careful Indeed

Last time I massaged this specific topic I summarised by ominously stating that the CEE economies and their central banks should be careful what they wished for in terms of using higher interest rates and subsequent nominal appreciation of their currencies to flush out inflation. The key point was that the effect would likely be limited and only further worsen the imbalances in the economies. And thus, here we are.

Another more subtle point in the context of market reactions would be the boomerang effect which comes from the currency appreciation as interest rates are increased (and the peg/band abandoned) to the subsequent plunge when the economic tide turns. In line with the change in global sentiment towards growth and deflation (see e.g. here) and the fact that other hitherto strong yielders (e.g. the Kiwi and Aussie) are beginning to falter we may be at an inflection point in the whole discourse of upwards movement in CEE currencies. Stephen Jen's recent tour of global FX markets is a fine addition to this argument.

As ever, this is obviously still a dilemma for most of these economies since inflation continues to rage ahead. In Romania for example the PPI rose at its highest pace since 2004. However, as long as the credit tap stays open and as long as the purchasing power is increasing so will the the demands for higher wages stay strong. This is particularly true in the context of the CEE economies as these are in possession of structurally broken population pyramids after two decades worth of lowest low fertility and, in the cast of the latter decade, net outward migration.

The main point I would like to emphasise here is that correction is coming and that it will only become harder the higher the currencies move upwards. In a more general light this correction will not be a small one and it most certainly will not be felt exclusively in Eastern Europe. Basically, the big hidden data point in all of this is the dependence of Germany on CEE imports. So far, this has moved along just nicely but Germany is in for a rude awakening once the link breaks ... and break, I am afraid, it will.

Polands Central Bank Holds Interest Rate Steady In July

Poland's central bank kept its benchmark interest rate unchanged today as the economy slows and it anticipates inflation falling back. The Narodowy Bank Polski left the seven-day reference rate unchanged at 6 percent, after previously raising it four times this year.





The Monetary Policy Council has been struggling for nine months to bring down the inflation rate, at a four-year high of 4.6 percent in June, to its 2.5 percent target. Slower-than expected employment growth, retail sales and industrial output in June indicate the economy is losing steam and the central bank said this may damp inflation. Annual wage growth in Poland's corporate sector accelerated to 12.0% in June, above forecasts and up from a 10.5% rise in May. On the month,average wages were up 4.8%, following a 2.2% monthly decline in May. Total employment at firms with more than nine employees was running at 5.39 million in June, up 4.8% on the year. That annual rise was below the February peak of 5.9%, and suggests job creation in Poland is now starting to slow.




The economy expanded an annual 6.1 percent in the first quarter, down from 7.3 percent at the beginning of last year and 6.4 percent in the fourth quarter.



The 10.8 percent rise of the zloty against the euro, which has converted the zloty into the world's second-best performing emerging market currency this year, has also helped keep inflation in check. The June inflation rate of 4.6 percent was driven mainly by a 3.3 percent monthly gain and an annual 7.5 percent advance in fuel prices, which policy makers cannot control.

Momentum In Polish Retail Sales Slightly Weaker In June

Polish retail sales rose at their slowest rate this year in June, suggesting that the increase in consumer demand may now be slowing enough to allow monetary policy makers to pause before raising rates again. Retail sales rose at an annual 14.2 percent rate, compared with 14.9 percent in May. The monthly increase was 2.4 percent, after a 1.9 percent decline in May, the Warsaw-based Central Statistical Office reported today. The pace of retail sales growth has now halved since February in real terms.



Policy makers at the Polish central bank have lifted borrowing costs by 2 percentage points since April 2007 as wage growth and higher consumption have kept the inflation rate above the central bank's target of 2.5 percent for the last nine months.

Poland's June Industrial Output Rebound and Tame Producer Prices Lower Rate Rise Prospects

Expectations the Polish central bank would increase rates in the coming months eased back slightly this week following better than expected producer price numbers, and a rebound in industrial output which was lower than analyst expectations. And this despite the fact that consumer price inflation continues stuck significantly above the banks target.




According to data released by the Polish statistical office Poland's industrial output rose 7.2 percent year-on-year in June (see chart above), while the rate of increase in producer prices held constant at 2.7 percent year-on-year (see chart below).



Folllowing publication of the data Monetary Policy Council member Andrzej Slawinski is quoted as saying that the level of interest rates would now largely depend on the zloty.

"What is going to happen with the interest rate level will largely depend on the changes in the zloty exchange rate," Slawinski, seen as a moderate on the 10-member MPC, speaking to TVN CNBC.

The zloty - which was little changed after the data - has gained almost 4 percent against the euro in July alone and is up more than 10 percent since the start of the year.

Poland's Monetary Policy Council has raised rates eight times since April 2007, bringing the key rate to the current 6.0 percent in response to the booming economy, growing inflation and a tight labour market.




June consumer inflation stood at 4.6 percent year-on-year, above the central bank's 2.5 target.



However, not everyone is convinced about the inflation outlook, and Halina Wasilewska-Trenkner, a hawk on the 10-strong policy panel, told daily Rzeczpospolita during last week that although the zloty was probably too strong it was difficult to determine the level of excess, and hence the bank should continue to tighten monetary policy.

"Maybe growth is not as dynamic as last year but it is still robust growth," she said.... "I think that in the second quarter it could have been at about 5 percent but there is still a chance that the result for the whole year will be slightly higher. I believe that we should tighten monetary policy more,"

Also monetary policy maker Dariusz Filar argued on Friday that the Polish central bank should immediately raise its main interest rate by at least a quarter of a percentage point to cap inflation. The new core inflation rate, introduced three months ago, and which strips out food and fuel prices (thus giving a better reading on the state of domestic demand) - was probably a "bit too high'' in June (at 2.2 percent) and thus Narodowy Bank Polska's 6 percent seven-day reference rate was not enough to adequately cap price growth.

``That's why an immediate reaction is needed,'' Filar said in an interview on Friday in Warsaw. ``Waiting too long with a change of interest rates may cost us in the future in the form of a higher inflation rate.''

Central bank policy maker Halina Wasilewska-Trenker has also added her voice to the debate. Wasilewska-Trenker stated in an interview with a Polish news agency this weekend that Poland's 6 percent interest rate should be raised as slower-than-expected industrial output data last month provided no proof of an economic slowdown. ``Eonomic growth is still robust,'' ....Poland is ``far from a rapid slowdown,'' she added.

Monetary Policy Council member Marian Noga also feels the Polish central bank should raise interest rates even as economic growth slows because accelerating inflation is only going to prompt demands for higher wages. Noga alos expects freeing energy prices as of next year will drive up inflation to almost 5 percent in January before slowing to below 3.5 percent in the middle of 2010.

``The faster-than-expected economic slowdown would have dismissed the need for interest rate increases if wages hadn't risen at such a quick pace,'' said Noga in a July 18 interview. ``Since second-round effects have emerged, policy tightening must be continued.''

``We realize that our decisions impact on the zloty but it can't be an obstacle for us,'' Noga said. ``It's not the zloty behind the slowdown, but the weakening global economy.''

Poland's Monetary Policy Council has ten members in total.

Polish Inflation Ticks Up In June 2008

Poland's inflation rate accelerated in June and reached a four-year high as fuel, alcohol and tobacco prices all surged. In my opinion the chances the central bank will lift interest rates again sooner rather than later has just risen. Poland's annual inflation rate rose to 4.6 percent from 4.4 percent in May according to the latest data from the Warsaw-based statistics office.



Poland's Monetary Policy Council have raised borrowing costs eight times in the past 14 months as accelerating wages and falling unemployemnt have fuelled consumption and kept inflation above their 2.5-percent target since last October.

Polish Central Bank Raises Interest Rates (June)

Poland's central bank raised its benchmark interest rate by a quarter of a percentage point yesterday. The rate now stands at 6 percent, the highest in three years, as record oil prices and rising consumer demand threaten to push up inflation. Polish policy makers have increased borrowing costs eight times since April last year while the inflation rate almost doubled.



The May inflation rate rose to 4.4 percent, the highest since December 2004, and has exceeded the central bank's 2.5 percent target for eight months. Annual consumer price growth may be as much as 4.7 percent in December, according to an updated central bank forecast.

Poland Retail Sales May 2008

Polish retail sales rose more than many observers expected in May, adding to speculation that central bank policy makers will increase interest rates tomorrow as domestic demand continues to fuel inflation. Retail sales rose an annual 14.9 percent, compared with 17.6 percent in April, according to data from the Warsaw-based Central Statistical Office earlier today.




Demand for consumer goods, in part a by product of record high employment and the fastest wage growth in eight years, has been driving inflation in Poland, boosting the impact of the surge in oil and food prices. Inflation has remained above the central bank's target of 2.5 percent for eight months.

Poland's annual inflationrate rose to 4.4 percent in May, up from 4 percent in April. Consumer prices rose a monthly 0.8 percent, compared with a gain of 0.4 percent a month earlier.

Wages in Poland's corporate sector rose 12.6% on the year in April, above forecasts and up from 10.2% in March, according to data released Monday by the Central Statistical Office. On the month, April average wages fell 0.2%, following March's 3.7% monthly rise. The figures are preliminary and cover Polish companies with more than nine employees.



Total employment at firms with more than nine employees amounted to 5.39 million in April, up 5.6% on the year.

Poland's jobless rate declined to the lowest rate in almost a decade in April, falling for a third consecutive month as robust economic growth boosted hiring. Unemployment declined to 10.5 percent from 11.1 percent in March, according to the methodology used by the Central Statistical Office. About 1.61 million Poles were registered as unemployed at the end of April, the office said.

Using the EU harmonised methodology there were 1.313 million Poles unemployed in March (the latest month for which we have such data) and the seasonally adjusted unemployment rate was 7.7%.



Construction output was up by 22.8% in April.




Most observes feel that the central bank Monetary Policy Council will lift the benchmark seven-day reference rate by a quarter of a percentage point to 6 percent tomorrow. Policy makers have lifted the rate to 5.75 percent in seven increases since April last year, when the rate was at the record low of 4 percent.



The Polish central bank rejected a bid to raise the benchmark interest rate a quarter of a percentage point last month since policy makers said they wanted to see the bank's inflation projection which is due this month, according to the minutes of the rate-setting meeting.

``Most members of the Council decided that the full assessment of the risk of persisting inflation'' will be ``possible after the release of the central bank's June inflation projection,'' the bank said in minutes from the May 27-28 meeting. ``This argument justified, in their opinion, leaving interest rates changed.''

However there is one possible snag with the interest rate rising scenario. The question is, what impact will such a move have on the appetite among Poles to contract debt in euros rather than in zloty. There is a considerable market for non-zloty loans in Poland, although it is not at this point as extensive as the demand for forex loans in places like Hungary, the Baltics or Croatia, and the appetite for such loans this does not seem to have grown disproportionately vis a vis zloty loans (both have been growing very fast) in recent years.




And there has long been a healthy demand for non zloty mortgage finance.




But interestingly, if we come to look at the comparative year on year changes between the two possibilities in terms of mortgage finance, what we will see is that while the zloty loans were gaining ground when monetary policy in Poland was relatively loose, since the National Bank of Poland started tightening in a serious way last autumn, the situation has inverted, and the year on year rate of increase in forex loans has been accelerating, while the rate of increase in zloty mortgage lending has been slowing. If the Polish central bank needs to continue to tighten and the ECB (despite Trichet's most recent sabre rattling) starts to loosen later in the year, then it will be interesting to follow the comparative path here, since the position in Poland gives a pretty good birds eye view of the effectiveness of single country monetary policy (or its limits) in the context of today's globalised world.

Poland Inflation May 2008

Poland's inflation rate rose in May to the highest since the end of 2004, increasing the possibility that the central bank will raise interest rates again as early as this month. The annual rate rose to 4.4 percent from 4 percent in April. Consumer prices rose a monthly 0.8 percent, compared with a gain of 0.4 percent a month earlier.

Poland's inflation rate has now been higher than the central bank's target for six consecutive months, a situation which has lead to seven increases in the key interest rate since April last year. The zloty rose to 3.3865 against the euro after the report before closing lower at 3.3900 in Warsaw. The prospect of rising interest rates is obviously liable to lead to zloty strengthening.

Polish Monetary Policy - A Hypothesis

Poland's Monetary Policy Council left interest rates unchanged in May for a second consecutive month as it awaits more data on inflation and economic growth before making any further increases. Rate setters kept the seven-day reference rate at 5.75percent at their meeting this morning.



The central bank has raised rates seven times in the past year to curb inflation as rising salaries and record-high employment spur consumer demand.

The question is, what impact will this have on the appetite among Poles to contract debt in euros rather than zloty. There is a considerable market for non-zloty loans in Poland, although this does not seem to have grown disproportionately vis a vis zloty loans (both have been growing very fast) in recent years.




More specifically there has long been a healthy demand for non zloty mortgage finance.




But interestingly, if we come to look at the comparative year on year changes between the two possibilities in terms of mortgage finance, what we will see is that while the zloty loans were gaining ground while monetary policy in Poland was relatively loose, since the National Bank of Poland started tightening in a serious way last autumn, the situation has inverted, and the year on year rate of increase in forex loans has been accelerating, while the rate of increase in zloty mortgage lending has been slowing. If the Polish central bank needs to continue to tighten and the ECB (despite Trichet's most recent sabre rattling) starts to loosen, then it will be interesting to follow the comparative path here, since it gives a pretty good birds eye view of the effectiveness of single country monetary policy (or its limits) in the present globalised world.

Poland GDP Q1 2008

Polish gross domestic product grew an annual 6.1 percent, compared with a revised 6.4percent in the previous three months, the Central Statistical Office in Warsaw said today. This rapid first-quarter growth may persuade policy makers to increase borrowing costs as a 10 percent gain in wages and record- high employment boost demand and inflation.



Domestic demand grew 6.3 percent, while consumer demand increased 5.6 percent. Investment rose 15.7 percent, construction gained 16.7 percent and production grew 6.9 percent, the statistics office said.

The Polish economy is expected to grow by "around 6 percent" in the current three-month period as domestic demand remains robust, Deputy Finance Minister Katarzyna Zajdel-Kurowska said.


The zloty strengthened to 3.3732 per euro as of 12:49 p.m. in Warsaw from 3.3790 yesterday. The yield on the benchmark five-year bond rose 2.9 basis points to 6.438 percent.

Polish Central Bank Leaves Interest Rates Unchanged in May

Poland's Monetary Policy Council left interest rates unchanged in May for a second consecutive month as it awaits more data on inflation and economic growth before making any further increases. Rate setters kept the seven-day reference rate at 5.75percent at their meeting this morning.



The central bank has raised rates seven times in the past year to curb inflation as rising salaries and record-high employment spur consumer demand.

Poland's inflation rate unexpectedly fell back in April, a factor which has also evidently influenced today's decision. The rate slipped to 4 percent from 4.1 percent in March. Consumer prices gained 0.4 percent in the month.




Unemployment has been falling steadily, and using the EU harmonised methodology there were 1.313 million Poles unemployed in March (the latest month for which we have such data) and the seasonally adjusted unemployment rate was 7.7%.



Polish retail sales continued to grow at a healthy clip in April, if rather more slowly than in March, a factor which may well have influenced the central bank policy decision. Retail sales rose 17.6 percent from a year earlier and 2.9 percent from March.



On the other hand Polish industrial output growth accelerated in April, although this whole situation is clouded somewhat by the timing of easter this year, and the fact that April thus had more working days than March. Production rose an annual 14.9 percent, compared from 1 percent in March. Month on month, production was up 4 percent over March.





The zloty has gained 5.6 percent against the euro and 12.7 percent vis a vis the dollar this year, driven by strong economic growth, the prospect of euro adoption and rising yield differentials as the central bank has steadily raised rates.

The Polish government now forecasts that growth will slow to 5.5 percent this year from the decade-high 6.5 percent in 2007.



Central bankers are concerned that slowing growth won't prevent higher wages and employment from speeding up inflation. Average corporate wages rose an annual 12.6 percent in April, while employment increased 5.6 percent from a year ago. It remains to be seen whether the current policy rate will be sufficient to continue to hold back inflation given the vigour of the current expansion and the steadily dwindling pool of appropriately trained and educated workers.