Poland’s First Central Bank Rate Hike Announced

January 19, 2011

The Monetary Policy Committee of the Narodowy Bank lifted its key reference rate by 25 basis points to 3.75%, effective tomorrow.  Roughly two-thirds of analysts anticipated this initial tightening following hawkish remarks by Governor Belka earlier this month that hinted at a need for pre-emptive gradual tightening to contain inflation.  The previous last rate hike, a rise of 25 basis points to 6.0%, was made in June 2008.  Six subsequent reduction of 25 bps in November 2008, February 2009, March 2009 and June 2009 and of 75 bps each in December 2008 and January 2009 had slashed the reference rate to a record low of 3.5%.

Policymakers observe a permanent on-year CPI inflation target of 2.5%.  A one-percentage point margin above or below 2.5% is used for operative purposes, but officials have underscored that the mandate is to keep inflation as close as possible to 2.5% at all times, not 3.5% or 1.5%.  So when inflation hit 3.1% in December, up from 2.7% in November and just prior to this month’s increase in value added taxation, the stage had been set for the central bank to begin normalizing policy provided that the EU debt crisis remained reasonably calm, which it has been of late.  Polish GDP in 3Q10 was 4.3% greater than a year earlier and is likely to advance around 4% in 2011.

The Zloty is weaker against the dollar than a year ago but has been strengthening lately.  Monetary officials are not averse to some exchange rate appreciation, observing that such can shoulder some of the burden of inflation containment.  The next interest rate policy announcement is scheduled for February 15.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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