Bloomberg News

Polish Inflation Surge to Test Central Bank’s Credibility

June 16, 2011

(Updates with wages, comment in 15-16th paragraphs.)

June 16 (Bloomberg) -- Polish central bankers, who signaled a pause in interest-rate increases this month, will have their credibility tested as they consider a surprise surge in inflation to the fastest pace in almost a decade.

May consumer prices jumped 5 percent from a year earlier, the most since August 2001, a report showed yesterday. Policy makers on June 8 raised rates for the fourth time this year and signaled they would keep borrowing costs at 4.5 percent to weigh the effects of 100 basis points of tightening. The central bank “won’t panic,” Governor Marek Belka said yesterday.

Accelerating price growth “puts the Monetary Policy Council in an uncomfortable position,” Grzegorz Maliszewski, chief economist at Bank Millennium SA in Warsaw, said yesterday by phone. Rate setters may “decide more hikes are needed. However, we doubt it is likely to happen in July as it would lower the credibility of the last message.”

Council members and Prime Minister Donald Tusk rushed to reassure markets that the figures haven’t changed their expectation that inflation will slow this year. Traders haven’t increased bets on the extent of tightening this year.

Investors on the derivative market expect the central bank to raise interest rates one more time this year, the same as after the rate increase earlier this month.

One More Increase

Six-month forward rate agreements are trading 38 basis points above the three-month Warsaw interbank offered rate, down from 60 before the last rate decision, according to data compiled by Bloomberg. Three-month agreements were 20 basis points higher. A basis point is the equivalent of 0.01 percentage point.

“We believe that the Monetary Policy Council hasn’t ended its tightening cycle yet and will raise rates by 25 basis points one more time this year,” Jaroslaw Karpinski, a fund manager at ING Investment Management Polska SA, said by e-mail. “It isn’t going to happen in July but rather in few months.”

The central bank will embark on “a more precise analysis” to decide “whether the increase was definitely of a temporary or a more lasting nature,” Belka said yesterday on the website, according to the Polish newswire PAP.

Belka said last week the Monetary Policy Council would wait to see if this year’s rate increases were sufficient to slow inflation to its medium-term target of 2.5 percent. Last month he said prices would fall to that goal toward the end of 2012.

‘Falling Behind’

Policy makers raised rates by a full percentage point from a record low because they were concerned rising prices would prompt higher wages demands. At 4.5 percent, the Polish benchmark is still below the inflation rate.

The central bank “is very clearly falling behind the curve on monetary policy,” said Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. “The sharp rise in inflation is a serious blow to the credibility of monetary policy, and there is a serious risk that inflation expectations could accelerate further.”

Price increases are due in part to items that can be influenced domestically, Radoslaw Bodys, a London-based strategist at UBS Investment Bank, wrote yesterday in an e- mailed note, adding that the “optimal” interest rate is “close to 6 percent.”

The inflation rate may fall to 4.8 percent this month, the Economy Ministry estimated yesterday, PAP reported.

“All forecasts indicate inflation should start weakening at the end of the summer, and I would like to rely on these forecasts,” Tusk said at a news conference yesterday in Warsaw.

Wage Pressures ‘Absent’

Growth in corporate wages slowed to 4.1 percent in May from 5.9 percent in April, the Central Statistical Office reported today. The figure was below the median forecast of 5.4 percent from 25 economists surveyed by Bloomberg. Corporate employment rose 3.6 percent, below the 3.8 percent estimate.

“Wage pressure remains absent” and “jobs aren’t being created fast enough to generate wage pressure,” said Jakub Borowski, chief economist at Invest-Bank SA in Warsaw.

Some policy makers are concerned about slowing economic growth. There is no room to raise interest rates because doing so may hurt investment, Elzbieta Chojna-Duch, a member of the Monetary Policy Council, said yesterday, according to PAP.

“If we keep on raising rates as long as inflation exceeds the target, we would overshoot,” said Andrzej Bratkowski, another panel member.

Slowing Growth

The central bank in February cut its forecast for this year’s economic growth to between 3.3 percent and 5.1 percent from a range of 3.3 percent to 5.5 percent. The expansion may be between 2.3 percent and 4.8 percent next year, compared with an earlier forecast of 2.8 percent to 5.5 percent, it said.

Chojna-Duch and Jerzy Hausner are among the policy makers who said growth probably won’t exceed 4 percent this year as output is set to slow in the second half. Gross domestic product increased 4.4 percent in the first quarter from a year earlier.

“I don’t think that” the May inflation figure “is a shock in the sense that central bankers really have to consider a rate hike immediately,” Piotr Chwiejczak, an emerging-market strategist at Barclays Capital in London, said yesterday. “For secondary inflation effects, you would have to have the labor market kicking in, but it’s not yet very strong.”

--With assistance from Dorota Bartyzel in Warsaw and Willy Morris in London. Editors: Balazs Penz, Willy Morris

To contact the reporters on this story: Agnes Lovasz in London at; Monika Rozlal in Warsaw at

To contact the editor responsible for this story: Balazs Penz at

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