Polish monetary-policy makers unexpectedly raised borrowing costs as the European Union’s biggest eastern economy shrugs off the slump in the euro area and inflation continues to exceed the central bank’s target.
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. The bank’s Monetary Policy Council will hold a news conference to explain its decision at 4 p.m.
The policy panel warned last month that rates may rise if the economy avoids the slowdown in the euro region, its main export market. Interest rates rose for the first time since June 2011 after the inflation rate has exceeded policy makers’ 2.5 percent target for 18 months.
“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 zloty strengthened after the decision and traded at 4.2070 at 12:32 p.m. in Warsaw, up 0.1 percent on the day. The yield on the two-year government bond increased 4 basis points to 4.73 percent.
Traders had pared expectations for a rate increase before the decision, with the premium on three-month interest-rate forward contracts over the benchmark Warsaw interbank offered rate falling to a one-month low of seven basis points on May 4 from 19 on April 18, according to data compiled by Bloomberg. The extra yield on Polish two-year bonds over similar-maturity German debt has decreased 15 basis points in four weeks to 450 basis points, or 4.5 percentage points, the data show.
“The rate hike wasn’t sufficiently priced in by the market and we’ll now see an adjustment,” Marek Kaczor, head of fixed- income trading at PKO Bank Polski SA in Warsaw, said by phone. “We should expect some strong re-pricing of short-term paper.”
Eastern European Rates
Policy makers across 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 while Czech policy makers have left the two-week repurchase rate at a record-low 0.75 percent since May 2010.
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 January last year. A majority on the 10-member Monetary Policy Council declined to raise rates last month, choosing to await more data to gauge the state of the economy.
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.
The economy of Poland, the only member of the 27-nation EU to avoid recession in 2009, will expand 2.5 percent this year, the fastest pace in the EU, according to the European Commission. 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.
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