National Bank of Poland council debates need for further tightening

By Angela McDaniels

Tacoma, Wash., Feb. 17 - The National Bank of Poland's decision to raise its reference rate in January could be the beginning of a gradual tightening of the Monetary Council's monetary policy, according to minutes released by the bank Thursday.

As previously reported, the Monetary Council increased the reference rate by 25 basis points to 3¾% at its meeting on Jan. 19 after leaving the rate unchanged since June 2009.

According to the minutes, a majority of the council expected further tightening, the scale and pace of which would depend on incoming macroeconomic data.

A minority of the council believed it too early to decide whether further tightening would be necessary. These members said any decisions should take into account, among other things, the monetary policy of the European Central Bank, which might not start increasing interest rates until the second half of 2011.

Inflation predictions

Inflation of consumer prices rose to 3.1% in December, which is above the bank's 2.5% target.

Some council members believed inflation might fall in the second half of 2011. In the meanwhile, they said, inflation will likely rise due to factors independent of domestic monetary policy such as increases in most value-added tax rates.

Other council members noted that the rise in inflation in December was partly connected with a rise in core inflation and that forecasts suggested that consumer inflation would remain above the inflation target over the council's horizon.

Those council members said the rise in global commodity prices translates into increasing production costs. In their opinion, the continued economic recovery in Poland, combined with rising inflation abroad, will make it easier for enterprises to shift their growing costs onto consumers.

The members of the council agreed that the risk of inflation consolidating at a heightened level was enhanced by a considerable rise in the inflation expectations of individuals and enterprises at the end of 2010 and upward revisions made by financial sector analysts to their inflation forecasts.

At the meeting, the council also raised the lombard rate to 5¼%, the deposit rate to 2¼% and the rediscount rate to 4%. In each case, the increase was 25 bps.

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