June 13 (Bloomberg) -- Soccer fans at the European Championship in Poland are being greeted with surging prices that threaten to quicken inflation and cloud the interest-rate outlook in the European Union’s biggest eastern economy.
Poland and Ukraine are co-hosting the globe’s second-biggest soccer event after the World Cup, drawing as many as 800,000 fans to watch 16 national teams, according to the Polish Sports Ministry. Hotels and restaurants have jacked up prices for the three-week tournament to make up for slumping domestic demand with joblessness at an almost five-year high.
Poland’s central bank was the first in the EU to raise borrowing costs this year when it increased its benchmark rate by a quarter-point to 4.75 percent. Accelerating inflation and economic growth that the European Commission forecasts to be the EU’s fastest this year make an increase next month “very likely,” central banker Adam Glapinski said last week.
“We do expect that June will bring a significant increase of prices on additional demand pressure related to the EURO 2012 tournament, taking the CPI index well above 4 percent,” said Jaroslaw Janecki, chief economist at the Warsaw unit of Societe Generale, who predicted the rate increase in May. “Another rate increase by a quarter point in July is quite likely.”
Poland’s policy makers are also keeping an eye on a weakening currency that’s driving up import costs. The zloty lost 4.9 percent against the euro in May, the worst slide in eight months and the second-steepest decline of more than 20 emerging-market currencies tracked by Bloomberg after the Russian ruble.
The zloty traded at 4.3240 per euro at 2:58 p.m. in Warsaw from 4.3412 late yesterday. Five-year bonds yields fell five basis points to 4.91 percent as of 2:12 p.m. in Warsaw, according to data compiled by Bloomberg.
The inflation rate fell to 3.6 percent in May, the lowest in 15 months, the statistics office in Warsaw said today. While the figure was better than the 3.8 percent median estimate of 25 economists surveyed by Bloomberg, economists at Bank Pekao SA and Bank Zachodni WBK forecast the rate will rebound to about 4 percent in June and will stay at that level until the third quarter.
A “potential Euro 2012 effect may add 0.1-0.5 percentage point to the” consumer-price index, “which in an extremely negative scenario could cause inflation acceleration even up to around 5 percent,” Radoslaw Bodys, chief economist at PKO Bank Polski said in a note to clients today, forecasting the soccer tournament will also boost core inflation, “which may strengthened the hawkish part of the Council.”
Inflation Above Target
Inflation, which has exceeded the 3.5 percent upper end of the central bank’s tolerance range since January 2011, unexpectedly accelerated in April to 4 percent from 3.9 percent the month earlier, while core inflation excluding food and energy rebounded to a four-month high of 2.7 percent.
Prices in Poland are on average lower than in the EU, which may be used as “an excuse for companies to take advantage of Euro 2012 and raise prices more than justified by costs,” the central bank’s Economic Institute said in a report obtained by Bloomberg News. The tournament’s impact on prices will be “limited and temporary” as accommodation services comprise 0.3 percent of the consumer-price basket, it said.
Boosted by 90 billion zloty ($26 billion) in soccer-related investments in stadiums, roads and railways, the economy grew 3.5 percent in the first quarter after expanding at annual rate of above 4 percent in the previous seven quarters.
Gross domestic product will expand 2.7 percent this year, the fastest pace in the EU, according to the commission. Private consumption grew 2.1 percent in the first quarter, the same rate as in the previous three-month period and down from 3.7 percent in the same quarter last year.
Slowing economic growth won’t offset higher prices for another quarter, said Monika Kurtek, chief economist at Bank Pocztowy in Warsaw. The effects of the soccer event will support “GDP growth in the second quarter, helping it to grow maybe even faster than in the first quarter,” she said.
Hotel prices in all host cities have quadrupled on average, according to an informal survey by Bloomberg News. Chains such as Hyatt Hotels Corp. in Warsaw doubled average prices on game days. Lower-rated hotels in the capital increased rates three or four times on match days and are fully booked, according to the survey based on calls to hotels and rates posted on websites.
‘Cash Cow’ Tourists
“Tourists may become cash cows,” said Glenn Standish, who created TorunTips.com to guide foreign fans in the central city of Torun, 210 kilometers (130 miles) northwest of Warsaw and about halfway between Poznan and Gdansk. “Many Irish fans are now basing themselves in Torun as prices of accommodation in the likes of Poznan and Gdansk are in some places six times the normal rate.”
The tournament wasn’t used as an excuse to raise prices, said Magdalena Jaworska, marketing director at the Warsaw Hyatt. Any rate increases are limited to game days and won’t remain, said Konstanze Auernheimer, London-based director of marketing and analysis at STR Global, which monitors the hotel industry.
Prices at some hotels in Gdansk surged to more than 10 times the normal rate. Parnas Hotel listed a double room for 3,800 zloty on June 10, when European and world champion Spain was held to a 1-1 tie by Italy in the city on the Baltic coast, compared with 300 zloty on a regular day.
“Prices at restaurants and bars will follow hotel prices,” said Piotr Gantner, chief of the Polish Food Producers Association. For restaurants, caterers and hotels, “it will be an extraordinary occasion and a very last chance to profit at a time when local demand has begun to dry up and economic growth is poised to weaken.”
While the resulting increase in the inflation rate may be temporary, it will make it more difficult for the central bank to reach its target for consumer prices, Glapinski said in an interview in Warsaw on June 9.
“While the available research suggests that Euro 2012 will have a temporary and insignificant impact on inflation, it won’t do anything to curb price growth and fits in with expectations of higher inflation,” Glapinski said. “Prospects for inflation returning to the target haven’t improved and the rate increase in July is very likely to me.”
Price growth will be 4.1 percent at the end of this year, the Narodowy Bank Polski said in its latest inflation projection, published in March, 1 percentage point higher than it previously predicted. The next forecast will be available in July. Policy makers claim price stability as their prime responsibility.
“Euro 2012’s impact on prices will be temporary,” while “after the tournament new factors will affect inflation,” said Gantner of the Polish Food Producers Association, pointing to a weak global grain outlook. “The impact will last long enough to keep the inflation rate at an elevated level through the end of the year.”
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