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Poland May Need to Lift Benchmark Rate Twice, Zielinska Says

July 22, 2011

(Updates with the graph comparing swap rate with main rate in sixth paragraph.)

July 22 (Bloomberg) -- Poland’s central bank may need to raise interest rates once or twice in the next three quarters as tightening so far this year may not be enough to slow inflation to its goal, policy maker Anna Zielinska-Glebocka said.

Restrictive monetary policy shouldn’t be dropped as long as the core inflation rate, which was unchanged at 2.4 percent in June, remains above 2 percent, Zielinska-Glebocka said yesterday in an interview in Gdansk, Poland. That level is “high and alarming,” showing that inflation pressure persists, she said.

The Narodowy Bank Polski left the seven-day interest rate at 4.5 percent this month after raising borrowing costs by 1 percentage point this year to tame inflation that has stayed above its 2.5 percent target since October. Policy makers, who didn’t rule out further tightening, said they were pausing to evaluate the effect of higher interest rates.

“I’m not sure the tightening to date is enough to bring inflation to the target,” Zielinska-Glebocka said. “The current level of interest rates is still inadequate to the present economic situation, and the trends we are observing now justify one or two hikes within the next two to three quarters, although I wouldn’t set the timing.”

The zloty fell 0.7 percent against the euro in the past three months, the sixth-worst performance among more than 20 emerging-market currencies tracked by Bloomberg. Investors on the derivative market dropped expectations for interest rate increases this year, with six-month forward rate agreements trading 23 basis points above the three-month Warsaw interbank offered rate, compared with 31 basis points on July 1.

‘Stronger Measures’

The difference between the two-year interest swap rate, a gauge of short-term rates in the next two years, and the central bank’s rate is at the narrowest since March 2009, showing that traders in the market don’t expect monetary tightening.

The inflation rate fell to 4.2 percent in June, dropping more than economists forecast after rising to 5 percent in May, the highest in almost a decade. The central bank projects the consumer price index will rise 4 percent this year, 2.7 percent in 2012 and 2.4 percent in 2013.

“We can’t allow the inflation rate to stabilize at an elevated level. Even if it stops rising and hovers above 3.5 percent, that would still be an important reason to act,” Zielinska-Glebocka said. “Perhaps it’s worth taking stronger measures now to secure the economy against future price growth.”

Growth Concern

Policy makers including Elzbieta Chojna-Duch have said borrowing costs should be left unchanged because further tightening may stall Poland’s recovery.

Industrial-output growth unexpectedly slowed to 2 percent in June, the lowest in 20 months. The central bank’s quarterly report on business confidence showed companies plan less new investment in the third quarter than in previous three months.

Zielinska-Glebocka said she sees no threat to this year’s growth forecast of 4 percent.

“Real interest rates are very low, so I’m not concerned that we’ll hurt economic activity,” she said. “The output slowdown and reluctance to invest we can see now may be a temporary reaction to the euro area’s problems and ensuing exchange-rate volatility. We’re more likely to see a classic cyclical slowdown in the first half of 2012.”

The risk that high inflation may trigger wage demands adds to the argument for further interest rate increases, Zielinska-Glebocka said. Average corporate wages increased 5.8 percent in June from a year earlier, beating expectations.

“We can’t neglect the potential inflation risks posed by the labor market,” she said. “Persistent high inflation can spark wage pressure. That’s another reason to extend this tightening cycle for a little while.”

--Editors: Balazs Penz, David McQuaid, Andrea Dudik, Willy Morris

To contact the reporter on this story: Monika Rozlal in Warsaw at

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

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