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Polish Rate Increase in July Is Very Likely, Glapinski Says

Poland’s central bank is “very likely” to raise borrowing costs next month as the economy is weathering Europe’s debt crisis while a weaker zloty stokes inflation, monetary-policy maker Adam Glapinski said.

The Narodowy Bank Polski in Warsaw on May 9 increased its benchmark rate by a quarter-point to 4.75 percent to curb inflation, which has remained above the its 2.5 percent target for almost two years.

Poland’s economy is set to grow at the European Union’s fastest pace this year according to the European Commission, which helped convince central bankers to support the first rate increase in the 27-nation bloc this year as the euro area struggles with a fiscal crisis that has pushed at least eight to of its 17 members to recession.

“The factors that caused the rate hike in May persist today, so an increase in July seems very likely to me,” Glapinski said in an interview in Warsaw on June 9. “Inflation is high, inflationary risks persist, the economic slowdown is mild. Our message for markets is clear-cut.”

The zloty lost 4.9 percent against the euro in May, the worst slide in eight months and the second-steepest decline among more than 20 emerging-market currencies tracked by Bloomberg after the Russian ruble.

Zloty, Bonds

The zloty traded at 4.2840 at 10:41 a.m. in Warsaw, strengthening 0.3 percent from late Friday. The yield on the government’s two-year bond rose to 4.81 percent from 4.78 percent.

Polish inflation, the second-highest in the European Union after Hungary, was 4 percent in April and probably slowed to 3.8 percent in May, according to the median estimate of 19 economists surveyed by Bloomberg News. The pace of price increases will probably accelerate again in the second half of the year, according to Bank PKO SA. (PKO)

Inflation is “stubbornly high” and prospects for its return to the target haven’t improved, Glapinski said, listing the zloty’s weakness against the euro and regulated prices among new factors that will keep inflation higher than the central bank can tolerate.

Risk Aversion

“Only retreating commodities prices help the inflation outlook, but one swallow doesn’t make a summer,” Glapinski said. “Lower commodities prices don’t include food prices. Energy prices are declining, while the zloty is already weaker than a year ago. Global uncertainty is boosting risk aversion and that may keep weakening the zloty even further.”

Poland’s economy expanded 4.3 percent last year and 3.5 percent in the first quarter from a year earlier, showing resilience to the stuttering euro region, which buys 55 percent of its exports. Gross domestic product is set to grow 2.7 percent this year, according to the commission.

The central bank left its benchmark rate unchanged last week at its highest since January 2009 and said it may tighten policy further if inflation fails to slow and the economy avoids a sharp slowdown. “I don’t read any announcement of a rate increase” in the latest statement, Governor Marek Belka told reporters in June 6, noting the contrast with the central bank’s quarter-point rate increase in May that “was signaled, even though some of you didn’t believe us.”

‘Mindlessly Follow’

The European Central Bank also left interest rates on hold last week, keeping its benchmark at a record low of 1 percent after two cuts in the second half of 2011.

“Polish monetary policy makers can’t mindlessly follow the ECB,” Glapinski said. Twenty-two of 31 economists surveyed by Bloomberg forecast rates being held in May even after the central bank “clearly communicated” the move in its statement a month earlier, according to Glapinski.

Glapinski said that he has “a feeling markets are still ignoring the bank’s arguments.” Unless economic growth in Poland suffers a plunge, “a rate cut this year is ruled out,” he said.

“Our monetary policy is based on a direct inflation target and we’re not going to give up this rule,” Glapinski said. “If markets finally catch on, they’ll realize our determination to control prices isn’t an obsession, it’s logic.”

Glapinski, who has called for increasing the benchmark rate since the start of the year, voted for a rate increase in April. The motion failed to win majority as it won support from only two other members of the council, Zyta Gilowska and Andrzej Kazmierczak. The voting tally from the May rate meeting has yet to be published.

A rate increase may be the “best way” to sustain lending by Polish commercial banks as the resulting spur to deposits would offset possible capital outflows to euro-area parent banks hit by the debt crisis, Kazmierczak was quoted today as saying by PAP newswire.

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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