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Polish Inflation Probably Peaked as Interest Rate Increases Bite

Polish inflation probably peaked in May and will slow in the coming months as the effects of three interest rate increases by the central bank curb price growth.

Consumer prices rose 4.6 percent from May 2010, compared with 4.5 percent in April, according to the median estimate of 28 economists surveyed by Bloomberg. The Warsaw-based Central Statistical Office will release inflation data at 2 p.m. today. Prices advanced 0.4 percent on the month, the survey showed.

The Narodowy Bank Polski raised its benchmark seven-day rate by a quarter-point to 4.5 percent on June 8, the fourth increase this year and the third in three months, to curb inflation, which hovered in April above the central bank’s 2.5 percent target for a seventh consecutive month. Policy makers are concerned that Poles will demand higher wages in the face of strong price growth.

“The June rate hike was in reaction to price growth as this peak was anticipated by the Monetary Policy Council,” said Tomasz Regulski, an economist at Raiffeisen Bank Polska in Warsaw, which forecasts a rate of 4.8 percent. “We may see one more rate increase in September if prices grow more than expected.”

Policy makers around the world are battling to contain inflation spurred by rising food, commodity and energy costs. Central banks in Norway, Russia and Denmark, along with the European Central Bank, have increased borrowing costs in the past two months in response to price pressures.

Poland’s central bank will wait to see if the three last interest raise increases, which brought the main base rate up three-quarters of a percentage point to 4.5 percent, will be sufficient to slow inflation to its medium-term target, Governor Marek Belka said last week.

“This statement could be interpreted as an informal switch to a neutral bias in monetary policy, which supports our scenario of leaving interest rates unchanged to the end of this year,” said Katarzyna Hyz, an economist at PKO Bank Polski in Warsaw.

Inflation expectations in May were lower than the inflation rate for the first time in almost a year. Polish companies and households expected annual price growth at 4.3 percent within the next 12 months and only a fifth of those surveyed by the central bank expected inflation to accelerate, down from 31 percent in April.

Falling oil prices are also helping damp inflation expectations. Crude for July delivery on the New York Mercantile Exchange slid 2.6 percent to $99.29 a barrel on June 10, the biggest drop since May 11, as Saudi Arabia last week signaled it will boost supplies.

“Inflation is driven by factors that are beyond the impact of domestic monetary policy and demand pressure is still relatively low, so central bankers may easily pause the tightening for some time,” said Grzegorz Maliszewski, chief economist at Bank Millennium in Warsaw.

Not everyone is convinced that rates won’t rise further, with investors on the derivative market expecting two more increases this year. Six-month forward rate agreements are trading 50 basis points above the three-month Warsaw interbank offered rate, down from 80 before the June increase, according to data compiled by Bloomberg.

“Inflation will slow but it won’t be as significant a slowdown as expected, which leaves the door for further rate hikes open,” said Piotr Bielski, an economist at Bank Zachodni WBK in Warsaw.

Elzbieta Chojna-Duch, a Council member, said on May 24 she expects annual inflation rate to drop to 3 percent at the end of this year and meet the target by 2012. Bielski estimates the index will be still above 4 percent in December.

Core inflation rate, a measure of local demand pressures, probably rose to 2.2 percent in May from 2.1 percent in the previous month, according to median estimate of 18 economists polled by Bloomberg.

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