Citigroup Sees Polish May Inflation Expectations Higher at 4.4%

Polish companies and households’ inflation expectations probably rose “substantially” in May, providing more arguments for policy makers to increase the main interest rate next week.

The central bank’s May survey on price expectations, due tomorrow at 2 p.m. in Warsaw, will show that local companies and households expect the inflation rate will increase to 4.4 percent within the next 12 months, Piotr Kalisz, chief economist at Citigroup’s Polish unit, Bank Handlowy SA, wrote in a note to clients.

“Wages, inflation and retail sales data in May surprised on the upside, thus justifying faster rate hikes,” Kalisz said. “Additionally, recent weeks saw a substantial increase in the activity of trade unions in Poland and we believe it makes sense for the Monetary Policy Council to increase rates in June in order to minimize the risk of second-round effects.”

The council raised the benchmark seven-day rate a quarter-point to 4.25 percent on May 10, crossing the expectations of 24 of 31 economists in a Bloomberg survey. The move was made to preempt a buildup of wage and price pressures as inflation accelerated in April to 4.5 percent, above the central bank’s target of 2.5 percent, for a seventh month.

April wage growth of 5.9 percent was the highest since December in 2009 and “could be evidence that a threat of second-round effects in the Polish economy is becoming real,” monetary policy maker Jerzy Hausner told PAP newswire today.

“It’s obvious” that domestic borrowing costs will increase, Hausner said, ruling out forecasting when the rate should be raised noting it could be “in a month, two, or later.”

Citigroup’s model has a standard error for the forecast at 0.2 percent, according to Kalisz, who expects a quarter-point interest-rate increase in June.

Two-year interest-rate swaps that investors use to fix interest costs in the future were at 5.19 percent today, down from 5.22 percent on Friday and up from 5.14 percent on May 10, the day before the last rate increase.

The council holds its rate meeting on June 7-8.