A Rate Hike in Poland

May 9, 2012

The National Bank of Poland, also known as Narodowy Bank, has raised its key reference interest rate to 4.75% from 4.5%.  This was the first change since a 25 basis point increase in June 2011 and caught a majority of analysts by surprise, not that central bank officials didn’t leave clues that they might tighten.  A statement after this year’s April meeting warned, “in the opinion of the Council, the expected mild economic slowdown in Poland over the monetary policy horizon increases the probability of inflation remaining above the target in the medium term. Given the above, the Council will consider tightening of monetary policy in the nearest future, unless signs of considerable economic weakening in Poland appear and the outlook for inflation returning to the target improves.”  The reference interest rate had also been hiked by a quarter of a percentage point in January, April and May of 2011.  Before the four hikes in 1H11, the rate had been cut from 6.5% prior to November 2008 to an all-time low of 3.5% by June 2009. 

Poland has had decent growth with above-target inflation for some time.  Real GDP expanded 4.3% last year and is expected to lie about halfway between 2% and 3% this year.  Consumer prices recorded a 12-month 4.1% increase in the first quarter of 2012, 1.6 percentage points above target.  A slide to 2.5% is not anticipated anytime soon.

With today’s interest rate increase, monetary officials have prioritized anti-inflationary discipline above the need to guard against the effects of a weakening regional economy.  Poland’s rate increase suggests that bank authorities do not expect the ECB to cave in to outside calls for a further reduction of the ECB’s 1.0% refinancing rate.  And in assessing future prospects for inflation, today’s statement left open the door to the possible need for additional rate hikes beyond the new 4.75% level.

Since inflation will continue to be negatively affected by factors beyond the impact of domestic monetary policy, the expected slowdown may be insufficient to allow inflation to return to the target in the medium term. The risk of inflation remaining elevated is also heightened by the persistence of relatively high inflation expectations.  The Council assessed that containing the risk of inflation remaining above the target in the medium term requires an increase of the NBP’s interest rates. The incoming data will enable an assessment whether another adjustment of interest rates will be justified.”

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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