Polish Monetary Policy Left Unchanged in Possible Close Call

March 2, 2011

Narodowy Bank has implemented just one hike of its reference rate thus far, a 25-basis point increase on January 19 to 3.75%.  From June 2008 to November 2008, the rate had crested at 6.0%, still 225 basis points above the current level.  Monetary officials target CPI inflation in the medium term at 2.5%, give or take a percentage point zone of tolerance. Inflation in January accelerated to above the target range ceiling, reaching 3.8% after 3.1% at end-2010, and such is likely to go even higher soon, boosted by the recent value added tax increase and commodity price pressures.  Evidence of rising expected inflation suggest some possible erosion of confidence in the central bank as an inflation fighter.  So does zloty depreciation since the January rate increase.

A statement from the central bank today gave several justifications for not tightening monetary policy again at this time.  They had already done so in January.  Investment still hasn’t recovered, and corporate borrowing remains limited.  Doubts exist regarding the upturn in consumption in the face of high unemployment.  Measures are likely to be taken to curb foreign currency-denominated loans. 

Some of the statement’s language is hawkish, nonetheless, and new forecast revise projected 2011 inflation upward to 2.8-3.7%, at or above the upper part of the target range.  The projected CPI band midpoints of 2.8% in 2012 and 2.9% in 2013 remain in the upper half to the target range.  Indeed, the statement verbally concedes the possibilities of a gradual rose of wage and price inflation in the medium term along with upwardly creeping expected inflation.  Given the relentless upward pressure on oil and food prices worldwide, nobody should be surprised if the National Bank of Poland raises its reference interest rate after its next meeting.  In the remainder of 2011, a number of tightenings seems likely.  Officials meanwhile forecast GDP growth of 3.3-5.1% in 2011 followed by 2.3-4.8% in 2012 and 1.7-4.4% in 2013.  Unadjusted GDP rose 4.4% between 4Q09 and 4Q10, the strongest on-year advance in nine quarters. 

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



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