Polish Price ‘Hysteria’ Ends After Rate Raise, Belka Says
May 23, 2011, 8:22 AM EDTBy Agnes Lovasz and Nariman Gizitdinov
(Updates rate expectations in eighth paragraph.)
May 23 (Bloomberg) -- Polish inflation will peak within two months after a surprise interest rate increase in May eased price pressure, central bank Governor Marek Belka said.
“We are really very close to the peak” of consumer-price growth, Belka said in an interview in the Kazakh capital Astana on May 21. Following the rate increase “we are observing a certain attenuation of inflationary expectations. The hysteria is over.”
Wage growth is accelerating in Poland, the European Union’s largest eastern member, which escaped a recession during the credit crisis. The central bank raised borrowing costs three times since January as policy makers across the globe struggle to curb inflation.
The central bank unexpectedly raised its benchmark seven- day rate by a quarter-point to 4.25 percent on May 11. Policy makers sought to pre-empt pressure on prices as consumer spending is picking up and the inflation rate advanced to a 2 1/2-year high of 4.5 percent last month.
The increase probably changed the perception of how fast prices are going to rise and will “moderate” economic growth in Poland, Belka said. The decision “quickened” the monetary- tightening schedule without altering the final scale of planned raises, Belka said after the rate meeting.
The Monetary Policy Council adopted an “action scenario” that “called for two to four rate increases, each by a quarter- point, through the end of the year,” Adam Glapinski , a member of the rate panel, said on April 17.
‘No New Trajectory’
“This acceleration of interest rate hikes was not to be interpreted that we are on a new trajectory of interest rates,” Belka said on May 21. “It’s simply that we want to implement our strategy faster.”
Investors in the derivatives market have reduced expectations for higher rates in Poland since the rate decision, betting on two more increases by the end of the year. The spread between six-month forward-rate agreements and the three-month Warsaw interbank offered rate fell to 55 basis points from 66 basis points on May 11.
Rising food and oil prices are spurring inflation around the world. East European countries including Hungary and Russia have raised interest rates to slow inflation. The Czech central bank this month said it may raise rates sooner than forecast after policy makers rejected a motion to increase the benchmark to 1 percent from a record-low 0.75 percent.
‘Close to Goal’
Poland’s inflation rate, which has exceeded the bank’s 2.5 percent target for seven months, may drop “close” to the goal late next year, Belka said. Imported inflation is also eroding the purchasing power of consumers, he said.
NG2 SA, Poland’s largest shoe retailer, expects demand to grow this year, erasing a first-quarter loss, Deputy Chief Executive Officer Piotr Nowjalis told reporters on May 10.
Core inflation, which strips out volatile food and fuel prices from the consumer price index, increased to an annual 2.1 percent in April from 2 percent the month before.
The zloty has gained 1.1 percent against the euro this year, the fourth-best performance among 31 major currencies tracked by Bloomberg, helping the central bank combat price increases by making imported goods cheaper. The bank doesn’t aim to influence the exchange rate, Belka said.
‘Powerful’ Channel
“The appreciation channel is quite powerful and influences current inflation faster than the usual interest rate-channel, but we are doubtful that we can steer this process,” he said. “We don’t manipulate the currency. There is a certain appreciation potential, but we are not in the business of predicting exchange rate. We don’t have a target in our monetary policy to strengthen the zloty.”
Poland’s currency declined 0.6 percent to 3.9468 against the euro as of 1:12 p.m. in Warsaw, as Europe’s debt crisis hurt emerging markets.
When the government decided to convert the euros it receives from the EU to modernize the economy in currency markets, investors were mistaken to assume the step would limit the scope of future interest rate increases, Belka said.
“It was immediately interpreted that this is instead of interest rate moves,” he said. “Completely wrong. We have never said this.”
While government efforts to limit public spending may help combat inflation, Belka said he has “some doubts” Poland will be able to narrow the budget deficit to 2.9 percent of gross domestic product as planned next year.
The central bank took the government’s pledge “seriously” that it will implement “additional measures if necessary” to cap expenditures, he said.
--Editors: Paul Abelsky, Balazs Penz.
To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Nariman Gizitdinov in Astana at ngizitdinov@bloomberg.net
To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net
