Poland's central bank raised the benchmark interest rate for the first time since June 2008 to keep inflation from exceeding its target range and the zloty from weakening, signalling it may tighten policy further.
The Monetary Policy Council increased its seven-day reference rate by a quarter of a percentage point to 3.75 percent, matching the forecasts from 17 of 25 economists surveyed by Bloomberg. Eight analysts expected the rate to remain unchanged at a record low for a 19th month.
"Policy tightening is needed because higher rates could strengthen the zloty and minimize the effect of higher fuel and food prices," said Jaroslaw Janecki, chief economist at Societe Generale SA in Warsaw. "Higher rates may influence inflation expectations, which are correlated with headline inflation."
The Polish decision comes after Hungary raised rates twice in two months, pushing the benchmark to 5.75 percent, as consumer-price growth accelerates across eastern Europe. The Czech central bank has signalled it may raise its main rate from a record-low 0.75 percent in the second half of the year.
"Today's decision shouldn't be interpreted as a one-time adjustment of monetary policy," Narodowy Bank Polski Governor Marek Belka said at a press conference in Warsaw after the decision. "The central bank will be watching the situation carefully and take steps if needed."
The zloty traded at 3.8746 per euro at 7 p.m. in Warsaw from 3.8725 yesterday. The currency, which fell to a four-month low against the euro on Nov. 29, has risen 3.2 percent in the past month as policy makers, including Belka, said rates needed to rise to curb inflation.
Today's rate increase, along with Belka's comments, are a "clear roadmap," Martin Blum, co-head of asset management at Ithuba Capital in Vienna, wrote in an e-mail. Economists including Michal Dybula at BNP Paribas SA said statements from the governor published this month had conveyed contradictory messages, confounding expectations.
Belka on Jan. 5 said that rates should rise "pre- emptively" to tame inflation expectations, while yesterday the newspaper Super Express published a Dec. 28 interview in which Belka said the economy wasn't overheating.
'Close to Goldilocks'
"Belka's post-meeting statement once again emphasizes the central bank's preference to at least partially achieve monetary conditions tightening through a meaningfully firmer zloty," Blum wrote. "Given that inflation pressures are on the rise, this is as close to Goldilocks as you can get for non-resident holders of Polish government bonds."
Polish rates may rise again if commodity price pressures are sustained and economic growth holds up, he said. He expects the zloty to strengthen below 3.80 per euro within a month.
Monetary tightening may continue as early as next month if the inflation rate rises above the central bank's 3.5 percent target, industrial output growth remains strong, and the zloty fails to strengthen to more than 3.8 per euro, said Lukasz Tarnawa, chief economist at PKO Bank Polski in Warsaw.
"The paradox is that if the zloty strengthens strongly because the market is counting on another rate increase in March, the chances of the hike will diminish," Tarnawa said.
The currency has "substantial appreciation potential, probably of about 10 percent" and its gains would influence the scale of the monetary policy tightening, Belka said today.
The inflation rate rose to an annual 3.1 percent in December, remaining above the midpoint of the central bank's 1.5 percent to 3.5 percent tolerance range for a third month.
Inflationary pressure, spurred by high food and commodity prices, should begin to ease in the second half and inflation rate is likely to near the central bank's 2.5 percent target at the end of the year, said Andrzej Kazmierczak, a member of the rate-setting panel.
"We have acted to head off a wage-price spiral," he said at the press conference.
Investors in interest-rate derivatives are betting the central bank will continue tightening. Twelve-month forward-rate agreements, used to wager on changes in interest rates, advanced to 5.17 percent this month. The contracts are trading above the three-month Warsaw Interbank Offered Rate of 3.98 percent, indicating rates will increase further.
'Appetites Have Grown'
"Belka doesn't appear to be fully convinced rate increases are needed, except as a tool to make the zloty stronger," Mateusz Szczurek, chief economist at ING Bank Slaski in Warsaw, said by phone. "Twenty-five basis points was exciting two weeks ago, but now appetites have grown."
He expects rates to rise 1 percentage point in the next 12 months.
The Narodowy Bank Polski cut rates by 2.5 percentage points from November 2008 through June 2009, helping make Poland the only European Union country to avoid a recession during the global financial crisis.
The Polish economy expanded by 4.2 percent in the third quarter, the fastest in two years, driven by private consumption and inventory rebuilding as recovering demand at home and abroad prompted companies to boost hiring and wages. The Monetary Policy Council said in its post-meeting statement that faster economic growth is boosting a recovery in the jobs market and could fuel wage and inflationary pressure in a medium term.
"That, combined with a strong rise in global commodity prices, poses the risk that heightened inflation expectations could persist," said Belka.
Article written by Monika Rozial
Comment from our Polish expert Antony Tilney - The expected Polish interest rate rises over the coming months and corresponding strengthening of the Zloty may assist those investors 'trapped' by high Swiss Franc (CHF) mortgages. The Zloty to Swiss Franc exchange rate has stayed stubbornly around the 3 to 1 range for a couple of years now (partly due to the 'safe haven' effect on the Swiss Franc during the global recession), higher Zloty interest rates may reduce this although with the Franc's current very low base rates there is clear scope for rises which could offset the Zloty strength ! So nothing certain, unfortunately...
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