Polish economic growth beats forecasts in Q2, more rate hikes likely

Aug 30, 2007 - The Polish economy grew 6.7 pct from a year earlier in the second quarter and beat analysts' expectations on the back of booming domestic demand, paving the way for more rate hikes.

The expansion slowed from its fastest rate in a decade of 7.4 pct in the first three months of the year, but still exceeded average forecast of 6.1 pct from economists polled by state news agency PAP.

Growth in the European Union's largest post-communist economy was driven by a 9.3 pct rise in domestic demand.

Falling unemployment and a record rise in wages encouraged consumers to raise their spending by 5.1 pct and companies increased inventories by 34.2 pct to meet growing demand. Investments jumped 22.3 pct.

The data sparked hawkish comments from the central bank's policymakers after they raised borrowing costs for the third time this year to 4.75 pct yesterday.

Marian Noga said the data showed price pressures were on the rise and called for three more rate hikes by the middle of next year, as inflation could rise to 2.9-3.0 pct in December from 2.3 pct last month.

Stanislaw Owsiak, seen as a dove on the 10-strong monetary policy council, chimed in, saying inflation may be on the rise, but stopped short of calling for another rate hike.

"Second-quarter data points towards the possibility of growth in inflation pressure and confirms that this year's decisions to raise rates were right," Owsiak told Thomson Financial News in a telephone interview.

Poland's finance minister Zyta Gilowska took a more benign view of the data, saying the economy should grow by more than 6 percent this year, but the expansion was close to its peak and inflation pressures were easing.

"Second-quarter data are excellent," Gilowska told reporters. "They show pressures in trade are easing, which is particularly evident in the price of building materials, which makes pressure to raise prices weaker."

While analysts agree that the economy could be losing its momentum they expect expansion to continue in the coming quarters. It should be buoyed by strong consumption after the government cut payroll taxes in July, boosting disposable income of consumers as well as double-digit growth in investments.

"In the coming quarters we expect a continuation of some slowdown in economic activity, but its scale may be lower than had been previously expected," BZ WBK analysts said in a comment.