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Poland needs to slam monetary brakes after EU entry sends inflation soaring
Poland will have to slam on the monetary brakes to rein in a sudden burst of inflation that erupted after the country joined the European Union on May 1, casting a potential cloud over today's booming growth, analysts say.
Consumer prices jumped by 4.6 percent in the year to July, nearly three times the 1.7-percent rate posted in 2003, in a sign of the inflationary pressures seen across the central and Eastern European countries that joined the EU this year.
"If the central bank wants to meet its inflation target of 2.5 percent by the end of 2005, it will have to raise key interest rates," which have already been increased by 125 basis points in the past three months, Citibank Handlowy analyst Katarzyna Zajdel-Kurowska told AFP.
The Polish central bank this week issued a gloomy inflation forecast, warning that price rises will continue to accelerate until April 2005 unless it takes firm action, with a nine-percent hike in food prices expected in the next three months.
"The central bank's forecast is very pessimistic, because it predicts an inflation rate of six percent in the first half of 2005, while most analysts are expecting four percent," said Zajdel-Kurowska.
The centre-left government, alarmed at the effect upon public opinion of the spectre of soaring food prices, criticized the bank's report.
"A rise in food prices of nine percent is just pie in the sky," Agriculture Minister Wojciech Olejniczak told journalists Thursday.
Finance Minister Miroslaw Gronicki also weighed in, saying he did "not agree with this forecast, which is very pessimistic and useless for calculating the budget" next year.
Nonetheless, the prices of several basic foodstuffs jumped alarmingly between January and June, according to a study by the central bank.
Rice prices leapt by 27.7 percent, those for beef by 21.7 percent and bananas by 18 percent. Surprisingly, the cost of poultry and butter, expected to drop after EU accession, went up respectively by 22 and 13.7 percent.
Many of the price rises occurred around the time of Poland's entry into the EU "because of panic buying by consumers, exploited by producers and retailers," the consumer rights protection office, UOKIK, said.
Worried about inflationary pressures, Poland's central bank in August again raised its key lending rate -- the minimum bank intervention rate -- from six to 6.5 percent -- double the increase expected by the markets.
The raise meant 125 basis points had been put on interest rates since June
The discount rate also went from 6.5 percent to seven percent and the Lombard rate from 7.5 percent to eight percent.
"In general, in the medium-term, high interest rates will have a negative effect on growth," Zajdel-Kurowska said.
With Poland's booming economy driven largely by exports, the risk is that higher rates will further boost the value of the appreciating local currency, making Polish goods less competitive abroad.
"As long as the zloty does not appreciate too much against the euro, this growth is not at risk, but high rates will certainly boost the Polish currency over time," the analyst commented.
"They also will make credit more expensive and slow down investment and consumption, other engines of growth," she added.
Already the signs are there of a modest slowdown of growth from its current high level.
The Polish economy grew by 6.0 percent in the second quarter on a 12-month basis after posting 6.9-percent growth in the first quarter on the basis of official figures, an estimate from an independent economic institute CASE showed on Thursday.
CASE forecast that gross domestic product would grow by 5.8 percent this year and by 4.1 percent in 2005.
(Source: http://www.eubusiness.com/afp/040905031231.5hwwozta) |
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