National Bank of Poland considered inflation, food prices before lifting interest rates by 25 bps

By Laura Lutz

Des Moines, April 24 - The National Bank of Poland's Monetary Policy Council noted lower-than-expected inflation and a slowing in the growth of food prices before raising its key interest rates by 25 basis points, according to minutes of its March 26 meeting that were released on Thursday.

The discussion focused on inflation, including changes in food prices and regulated prices; outlook for economic growth, the labor market; and interest rate levels in Poland and abroad.

The council noted that, because of the annual revision of the consumer price index basket, the inflation data was revised downwards to 4.0% year over year from 4.3% year over year.

February inflation was significantly below expectations, despite a rise up to 4.2% year over year. The council attributed that fact to lower-than-expected growth in food and fuel prices.

Some council members believed that the revision of January's inflation and lower-than-expected February inflation made it safe to assume that inflation would be near the bank's inflation target sooner than expected in the February inflation projection.

The rise in annual inflation in February compared to January was attributed to a strong growth in regulated prices. Excluding regulated prices, the CPI fell from January to February.

Some members felt that regulated prices - driven by a rise in energy prices - and an expected adjustment of excise duty and value added tax rates to the E.U. regulations may be important factors driving inflation in coming years.

The annual growth of food prices declined in February, the council noted. Several members pointed out that that decline was also recorded in other countries. They said that, combined with information from world futures markets, might indicate that the growth in food prices experienced since mid-2007 was beginning to slow down.

Other members suggested that, because of expectations that crops in 2008 would be higher in 2007, prices of some food and agricultural commodities might decline in 2008-2009.

When considering monetary policy, some council members emphasized that a too-strong policy tightening might lead to an excessive exchange rate appreciation, which could cause a decline in the growth of Polish exports and gross domestic product.

On the other hand, some members argued that the observed appreciation of the zloty should be not be considered in monetary policy decisions because exchange rates can fluctuate considerably.

A motion to raise the key National Bank of Poland interest rates by 50 basis points was put forward and did not pass. Then, a motion to raise the same rates by 25 bps did pass.

The council raised the reference rate to 5.75%, the lombard rate to 7.25%, the deposit rate to 4.25% and the rediscount rate to 6%.

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