Polish central bank raises rates third time to keep inflation at bay

Aug 29, 2007 - Poland's central bank raised the benchmark interest rate for the third time this year to keep inflation in check after record growth in wages and surging consumer demand.

The reference rate rose 25 basis points to 4.75 pct, the monetary policy council said in a statement released today at the end of its two-day meeting. The rate-setting council lifted borrowing costs in April and June from the record low of 4 pct.

The bank's chief Slawomir Skrzypek will hold a news conference today at 4.00 pm CET to explain the decision.

Asked to comment on today's rate hike, Prime Minister Jaroslaw Kaczynski said "this is not good", adding he couldn't do anything about it because the "council is independent."

The European Union's largest post-communist economy grew 7.4 pct in the first three months of the year, its fastest expansion rate in a decade, on the back of higher investments and rising consumers spending.

The recent data showed wages posted a record rise in the second quarter as unemployment fell from its multi-year highs, helping retail sales grow 17.1 pct year-on-year in July.

While inflation has stayed below the central bank's 2.5 pct target some policymakers said in recent weeks that tightening a job market coupled with growing labour costs could spill over into consumer prices in the coming months.

"Today's decision shows that the council is concerned about the rise in inflation in the near future, in the context of labour market developments," said Ryszard Petru, chief economist at Bank BPH in Warsaw. "Hence, we should expect a hawkish statement and another hike in rates in October."

In separate interviews with Thomson Financial News earlier this month, Dariusz Filar and Halina Wasilewska-Trenkner said the central bank should act now to prevent inflation from spiraling out of control in the future.

Analysts agree that the tightening cycle will not end with an August hike and expect the main rate to peak at 5.5 pct next year. They also say the government's decision to raise the minimum wage by a quarter next year could strengthen the central bank's resolve to fight inflation.