Although most analysts failed to predict it, the decision by the National Bank of Poland’s monetary policy committee to increase its benchmark seven-day intervention rate on June 27 by a quarter point to 4.50% had only a marginal impact in the market. The zloty strengthened, as might have been expected, but there was only an extremely modest sell-off in the bond markets, particularly at the long end. Most activity took place at the short end of the yield curve.
In a statement that accompanied the rate increase, the central bank said: “Data since our last policy meeting confirm that a high level of economic activity should be sustained for the next several quarters, although the rate of economic growth will probably be somewhat lower than in the first quarter of 2007.”
According to Raiffeisen Zentralbank Österreich (RZB), the market had not expected any move until July, when the central bank publishes its inflation report. “The balance of power between hawks and doves in MPC is close and RZB analysts suspect that the rate hike was decided by a thin majority,” said RZB. “The fact that MPC did not wait with the hike until the new inflation report is published suggests that its view on the Polish economy has changed significantly and higher than expected wages data was just a trigger for that.”
As a result, RZB changed its forecast for the level where Polish rates will peak, suggesting that two further increases this year will be followed by a final rate increase in January 2008, taking the seven-day intervention rate to 5.25%.
Wike Groenenberg, senior strategist for Central Europe, Middle East and Africa at Citi, agrees that the rise was not widely expected. “The timing of the hike was a slight surprise. A move in July had seemed more probable, because that would have allowed the central bank to discuss the updated inflation report due before the July meeting,” she says.
“However, all of Poland’s economic indicators have been really strong and are consistent with higher interest rates now. And more rate hikes are to come, because the economy will continue to boom in the next few years. Fiscal policy is expansive, wage gains are high and the country is receiving large transfers from the EU,” Groenenberg adds.
She points out another major factor that is adding to pressures for further rate increases. “Poland is hosting the European Football Championships in 2012; that will lead to sizeable investments in infrastructure and create further pressures in the construction sector. The central bank is increasingly concerned about the impact of the economic expansion on prices and will therefore continue to hike rates. I think that interest rates can go as high as 6%, and possibly 6.5%, next year. This increase is more than implied in forward rates and suggests that the zloty can appreciate more over the next year,” she concludes.
