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Polish Central Bank Unexpectedly Raises Interest Rates

Polish monetary-policy makers unexpectedly raised borrowing costs as inflation continues to exceed the central bank’s target and the European Union’s biggest eastern economy slows less than they had forecast.

The Narodowy Bank Polski in Warsaw increased the benchmark seven-day interest rate by a quarter-point to 4.75 percent, the highest since January 2009, matching the forecast of nine of 31 economists surveyed by Bloomberg News. Twenty-two economists predicted no change. Polish bond yields rose to a three-week high after the decision, while the zloty fell to its weakest level since Feb. 16.

Interest rates rose for the first time since June 2011 after the inflation rate exceeded policy makers’ 2.5 percent target for 18 months. The policy panel warned last month that rates may rise if Poland avoids the slowdown in the euro region, its main export market. The economy will expand 2.5 percent this year, the fastest pace in the EU, according to the European Commission.

“The primary motivation is to try and rebuild a bit of credibility,” Paul McNamara, who oversees $7 billion as fund manager at GAM Investment, said by phone from London today. “If you actually look at Polish data it’s quite hard to make a case that Poland merits a hike. It’s more about NBP’s reputation than it is about the data at the moment.”

Rate Bets

Traders increased bets on further rate increases following the decision, with the premium on three-month interest-rate forward contracts over the benchmark Warsaw interbank offered rate rising to an 11-month high of 24 basis points, according to data compiled by Bloomberg.

Polish inflation slowed in March to 3.9 percent from 4.3 percent in February. The rate has exceeded the 3.5 percent upper limit of the central bank’s tolerance range since last January, which outweighed concern that monetary tightening would choke growth, central bank Governor Marek Belka told a news conference in Warsaw today.

“Inflation in Poland is persistently higher than we are willing to tolerate,” Belka said. “We are treating this more as a step toward normalizing than tightening monetary policy. Although we are seeing slowdown, it is more moderate than we expected.”

The yield on two-year government bonds, which are more sensitive to the interest-rate outlook, increased 3 basis points to 4.73 percent, a three-week high, as of 6:42 p.m. in Warsaw, according to data compiled by Bloomberg.

Zloty Weakness

The zloty, which was little changed after the decision, declined 0.7 percent to 4.2324 at 4:41 p.m. The zloty lost 3.6 percent against the euro in the past two months, the worst among European emerging markets.

“Perhaps recent currency weakness swayed the MPC to be more concerned over the potential pass through on inflation,” Tim Ash, chief emerging-markets economist at Royal Bank of Scotland Plc in London, wrote in an e-mail after the central bank’s “surprising move.” If the increase doesn’t halt zloty losses, “I doubt then that the NBP would really want to roll out a series of hikes to defend the currency.”

The central bank has dropped the wording from its statement that it will consider raising interest rates in the near future to show that the chances for an increase in borrowing costs is now smaller than it was a month ago, Belka told today’s news conference.

‘Containing the Risk’

Even so, policy makers didn’t rule out further rate increases.

“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,” according to a statement published today. “The incoming data will enable an assessment on whether another adjustment of interest rates will be justified.”

Policy makers across eastern Europe are weighing economic- growth prospects against inflationary pressures amid the continent’s sovereign-debt crisis.

Hungary last month kept its two-week deposit rate at 7 percent for a fourth month. Romania’s central bank has cut the benchmark interest rate four times since November to 5.25 percent while Czech policy makers have left the two-week repurchase rate at a record-low 0.75 percent since May 2010.

‘Stubbornly High’

Five of Poland’s last six economic indicators came in below the median forecast of economists surveyed by Bloomberg, with industrial-output growth slowing to 0.7 percent in March, the lowest since October 2009, from 4.6 percent in February, data from the Warsaw-based Central Statistics Office show. The April Purchasing Managers’ index fell to 49.2 from 50.1 in March, with a reading under 50 signaling a contraction of manufacturing from a month earlier.

Supporting growth can’t “be an excuse for tolerating such stubbornly high inflation,” central banker Andrzej Kazmierczak said in an interview on April 30. Four rate increases in the first half of last year by a combined 1 percentage point “have already taken full effect,” he said.

“Tightening monetary policy wouldn’t curb corporate demand for credit and would prevent second-round inflationary effects, sending a strong signal on the council’s resolve to combat inflation,” Kazmierczak said.

Gross domestic product, which grew 4.3 percent last year, probably expanded about 3 percent in the first quarter, central banker Elzbieta Chojna-Duch said in an interview on April 25.

“The hike should have limited impact on economic growth and inflation, mainly caused by exogenous factors, but the main argument was saving the credibility of the NBP’s inflation target,” Rafal Benecki, chief economist at ING Bank, said in a note. “We don’t expect that this is a beginning of a series of hikes. Conversely, we don’t exclude that the MPC may consider rate cuts as growth should slow even more in second half of 2012.”

To contact the reporters on this story: Dorota Bartyzel in Warsaw

To contact the editor responsible for this story: Balazs Penz at

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