Bloomberg News

Poland Needs to Hold Rates on Inflation Risk, Chojna-Duch Says

September 12, 2011

Sept. 12 (Bloomberg) -- Poland should keep interest rates unchanged this year as commodity prices may accelerate inflation in 2012, said Elzbieta Chojna-Duch, a central bank monetary- policy maker.

“Interest rates should remain unchanged at least through the end of this year,” she said in a Sept. 9 interview. “I wouldn’t initiate a discussion on rate cuts now and I think no such decision should be made before the end of this year. The current projection indicates we shouldn’t ease monetary policy too early as inflation may accelerate again as of June 2012.”

Investors on the Polish derivate market are betting the Narodowy Bank Polski will reduce its 4.5 percent benchmark interest rate by a quarter point within six months as waning export demand damps growth, taming pressure on prices. The Monetary Policy Council halted tightening in July after lifting borrowing costs by 1 percentage point in four steps this year.

Interest-rate expectations reversed across eastern Europe last month after reports of slowing economic growth and concern that expansion sputtering in the euro area will scuttle the region’s export-led recovery.

Polish six-month forward-rate agreements were 24 basis points below the three-month Warsaw interbank offered rate today, while they were 22 basis points higher on Aug. 1, suggesting a rate increase. A basis point is 0.01 percentage point.

Hungarian six-month contracts were 30 basis points below the three-month Budapest interbank offered rate, from being even at the beginning of last month. The similar Czech spread was 1 basis point below the interbank rate, compared with 16 above on Aug. 1.

Inflation Estimate Revision

A revision to the Polish central bank’s inflation estimate in November may be “slight” as commodity prices are unlikely to fall and will keep the inflation rate from a “sustainable” decline, Chojna-Duch said. Central bankers should stick to a wait-and-see approach as Poland may face stagflation, which would limit the room for relaxing monetary policy, she said.

Economic growth in the euro area, which buys 55 percent of Polish exports, slowed to 0.2 percent in the April-June period from the previous quarter, the worst since the bloc’s 2009 recession. Poland’s economy grew 4.3 percent from a year earlier in the second quarter, slowing from 4.4 percent in the first three months of the year.

The annual inflation rate was at 4.1 percent in July, falling from 5 percent two months earlier, the highest in almost a decade.

Growth, Labor Market

“Slowing economic growth and an unfavorable situation on the labor market reduce the risk that inflation pressure will arise,” said Chojna-Duch, who sees a chance the consumer-price index will fall below 3.5 percent this year and meet the central bank’s 2.5 percent target in April-May before rebounding in the second half of next year.

Slower price growth early 2012 will stem mainly from a statistical effect as inflation surged in the same period this year on a sales-tax increase and higher food cost, Chojna-Duch said. The core inflation rate, which excludes food and energy prices, will probably hover near 2.5 percent through the end of this year, she said.

Central bankers, who left the interest rates unchanged last week, said “further adjustments” to monetary policy can’t be ruled out in case of deteriorating inflation prospects. They cited the potential impact of the financial-market turmoil on the zloty as the main risk factor.

‘Allows for Interventions’

“The Monetary Policy Council will continue its strategy within the free-floating exchange-rate regime, which allows for interventions on the currency market,” said Chojna-Duch, adding that “interest rates shouldn’t be used to manage the currency.”

The zloty tumbled as much as 2.2 percent to 4.3483 per euro on Sept. 9, the weakest intraday level since July 2009, losing 2.8 percent over five days, the biggest weekly drop since the week ended Aug. 12.

“Such market volatility, combined with uncertainty over the crisis in the euro area and risks to the global economy, make an even stronger case for us to signal that our policy bias is neutral the the outlook is for stable interest rates,” Chojna-Duch said. “It would strengthen the National Bank of Poland’s credibility and perhaps ease concerns on the market.”

--Editors: Balazs Penz, Andrea Dudikova

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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