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Polish October Inflation Matches Median Forecast, May Delay Rate Increase

Poland’s annual inflation rate rose in line with economists’ forecasts in October, prompting traders to cut their bets on an interest-rate increase this month.

The rate advanced to 2.8 percent from 2.5 percent in September the Warsaw-based Central Statistical Office said today, matching the median forecast of 15 economists surveyed by Bloomberg. Consumer prices rose 0.5 percent on the month.

The central bank left its benchmark rate at a record-low 3.5 percent for a 16th month in October because of concern higher rates may attract capital inflows that would strengthen the zloty, hurting exports and economic growth. The Monetary Policy Council voted 6-4 against a rate increase in August, according to the latest vote breakdown released to the public.

“There’s a big struggle going on in the Monetary Policy Council, and I don’t think this week’s data will be quite enough to tip the balance toward an increase this month,” Piotr Bielski, an economist at Bank Zachodni WBK in Warsaw, said by phone. Policy makers may start raising rates as early as December, he said.

The central bank will keep interest rates at a record-low 3.5 percent at its next policy meeting on Nov. 22-23, according to nine of 12 economists surveyed by Bloomberg.

Polish derivatives traders reduced bets that borrowing costs may rise following the inflation report. One-month forward-rate agreements, used to speculate on rates within a month, dropped 5 basis points on the day to 4.0262 percent. The agreements are trading 18 basis points above the current three- month Warsaw interbank offered rate of 3.85 percent.

The zloty strengthened to 3.9259 against the euro at 6:34 p.m. in Warsaw from 3.9350 before the data release and was 0.5 percent higher on the day.

Belka Comments

Central bank Governor Marek Belka, who voted against a rate increase in August, said today that domestic borrowing costs may have to rise as the recovery strengthens.

“The improving growth outlook in Poland increases the risk that inflationary pressure, albeit currently low, will increase somewhat over the medium term, which may warrant some monetary tightening,” Belka said at a conference in Vienna. “Inflation is also expected to increase, partly due to temporary factors such as VAT rate hikes in January 2011.”

Money flowing into Poland from investors seeking higher- yielding emerging-market assets as the U.S. Federal Reserve keeps interest rates near zero may push the zloty higher and slow inflation, Belka said.

“If strong capital flows” persist, the stronger zloty may “take the burden off monetary tightening and limit the scope for interest rate increases,” he said.

Core Inflation

Andrzej Kazmierczak, a member of the Monetary Policy Council, said the consumer price index is rising because of “supply factors” that can’t be controlled by monetary policy and core inflation is expected to remain steady. Core inflation, which excludes food and fuel prices, held at a 34-month low of 1.2 percent in September.

Droughts in grain-exporting nations, including Russia and Ukraine, and summer floods in Poland have helped drive the cost of food, drinks and tobacco up 4.5 percent in the past 12 months, according to the statistics office.

The central bank should raise rates “only if inflation grows dramatically, and nothing like that is happening,” Kazmierczak said in a phone interview. “Further appreciation of the zloty is very likely” and that this prospect is “another reason to leave rates unchanged,” he said.

Poland last week sold a record amount of inflation-linked bonds as concern grew that rising consumer prices would prompt the central bank to raise interest rates. The Finance Ministry on Nov. 10 issued 2.3 billion zloty ($790 million) of bonds maturing in August 2023 at an exchange auction.

To contact the reporter on this story: Katya Andrusz in Warsaw at kandrusz@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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