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.

Merry Xmas and A Happy New Year

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.



Credit crunch, did someone use the expression credit crunch?

The Polish Economy: An Unlimited Need For People?

The gentleman in the photo is Konrad Jaskola, Chief Executive Officer of Polimex-Mostostal SA, Poland's biggest construction company, and according to this article in Bloomberg, he has just one message for us all: "I have an unlimited need for people".


The issue arising is that Joskola has plans to hire "several thousand" new workers next year to meet demand for new bridges and factories, but he has a problem, and the problem is that due to Poland's growing labour shortages he may have difficulty finding them. Poland's economy has been growing strongly in recent quarters, although not as strongly, it should be noted, in some of the more evidently "overheating" economies like the Baltics. Poland's economy expanded an annual 6.4 percent in the third quarter of 2007, following 6.7 percent growth in the second quarter and 6.8 percent in the first one, according to data released by the Warsaw-based Central Statistical Office at the end of November.





This strong growth rate is partly fueled by construction activity and partly by strong consumer demand for retail items like cars and washing machines. Construction in Poland rose 20 percent in the first nine months of 2007, and as can be seen in the chart below - which offers a breakdown of Polish GDP growth by components, construction has been playing a very important part in the process. The thing is, however, that construction activity is pretty labour intensive.





According to Joskola, Polimex needs to offer higher salaries across the board, to engineers and managers, and to on-the-ground site workers, as Poland's skilled workers steadily move abroad (like all that hedge fund money which is flowing in the opposite direction) in search of higher yield. As a result local competition for workers increases, and wages start strong upward climb. Polimex has raised wages by 11 percent over the last 12 months and plans to raise them them by a further 10 percent next year.


The company, which is a "recycled" formerly state-owned machinery supplier, established to drive Poland's post-World War II reconstruction effort, currently plans to spend as much as 200 million zloty on acquisitions next year, in order to add workers and production capacity. I imagine some, at least, of those acquisitions will have to be of workers coming from outside Poland.

Inflation On An Upward Path

Meantime Polish inflation accelerated to the upper end of central bank's target range in November on the back of higher food and oil prices, meaning policy makers at the central bank may be forced to raise interest rates again in the coming months, in so doing possibly pushing up the value of the zloty, and attracting even more funds in search of even more workers to put to work.

Polish inflation rate rose to 3.6 an annual percent in November from 3 percent in October, the Central Statistical Office reported today in Warsaw. Consumer prices gained a monthly 0.7 percent after rising 0.6 percent in the previous month. Food prices grew an annual 7.2 percent 1.3 percent from the previous month, while fuel prices soared 13.2 percent from November 2006 and 2.5 percent from last month




As Unemployment Continues To Fall

The unemployment rate fell for the ninth consecutive month in October to 11.3 percent from 11.6 percent in September, the office said in a separate report today. Earlier this month, the office said that average corporate wages advanced an annual 11 percent in October and employment grew a record 5 percent from the year before.



And Wages Continue To Rise



As I say, inflation in Poland is also being fed by a 10 percent average wage growth and record low unemployment this year. In fact Polish average corporate wages advanced in November at the fastest pace in more than seven years, suggesting that the very rapid economic growth and large scale out-migration of key age group workers may be squeezing the labour market more than people imagined, thus provoking the sharp rise in inflation. Wages rose at an annual 12 percent rate (and 4.8 percent from a month earlier) to 3,092.01 zloty, according to the Warsaw-based Central Statistical Office earlier this week.




While Remittances Continue to Flow in Strongly

Remittances from abroad, mostly by taking advantage of free movement of labor within the European Union, are currently estimated (by the Polish National Bank) to be worth almost 2.5% of the gross domestic product of 250 billion euros. Since the United Kingdom opened its labor market to Poles three years ago, at least half a million Poles have settled in Britain.

Marcin Korolec, under-secretary at Poland's ministry of economics is quoted as saying that "the statistics show that the transfer from Polish people working abroad is something like 6 billion euros a year....Obviously this is a huge amount of capital, a huge amount of flow. It has an impact on internal consumption and internal growth."




All of Which Produces A Rapid Rise in Sales

Polish October retail continued their rapid rate of annual increase adding to evidence that economic growth remains strong despite four interest rate increases from the Central Bank so far this year. Retail sales rose an inflation corrected 16.3% in October over October 2006, this was up from a 12.2% rise in September compared with 14.2 percent in September, according to the Warsaw-based statistics office today.





The growth which is driven by sales of vehicles (which rose 42% year on year) and sales furniture and household appliances (a 21.9% annual rate of increase) - confirms the impression that consumer demand is being bolstered by falling unemployment, which dipped to an 8 1/2-year low, higher wages, which last rose the most in seven years last month, and a steady and economically significant inward flow of remittances.


Monetary Policy in A Bind?


The central bank lifted the seven-day reference rate a quarter-point to 5 percent only last month, and this was the fourth increase since April, when the key rate was 4 percent. So as we can see, at this point of time , and against all traditional expectation, monetary tightening may actually be having the perverse effect of accelerating the economy.



At the same time the zloty continues its rise, trading at 3.58 to the euro after the release of this weeks wages data, holding near its highest in five and a half years.


So as the Monetary Council begins its 2 day meeting for December today, we can see that there are some difficult decisions to take. Members of the council have already made public some of their divergences, with policy maker Marian Noga having taken the view that "The sooner we have the hike, the better, as preventive action is cheaper than boosting rates to chase down inflation", while Council member Miroslaw Pietrewicz takes the view that Poland's central bank should delay raising the benchmark interest rate until policy makers have had time to assess whether the four increases already made so far this year have been sufficient to bring inflation into check in the mid term.

What this dispute is a reflection of are the serious issues which arise concerning the actual ability of conventional monetary policy to work in a situation like the one facing Poland, since raising interest rates may just as easily stoke up more inflation - as we have seen in Australia and New Zealand, and to some extent in China - by attracting more investment funds into the country. This issue became apparent when the zloty also gained after a central-bank policy maker Marian Noga said the interest rate may have to rise as much as three-quarters of a percentage point before the end of 2008 to ward off inflation. Normally, an impending rise in inflation and a monetary tightening process (which reduces growth) would be considered to weaken and not strengthen a currency. So what happens next? Well this is just what we don't know, since we have never been here before. Clearly these economies will continue accelerating till the day they can't. And after that, well we will have to wait till we get there to actually see. What is happening in Hungary may give us some clues, and what happens next in the Baltics will definitely provide another of the missing links. Meantime we are in "wait and see" mode I feel. And behind Poland, roaring down the track come Russia and Ukraine, remember.