Inflation Spike Near 5% Trips Alarm for Polish Policy Makers

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The upward march in Polish inflation is fueling concern on the central bank’s interest-rate-setting body that could weaken its longstanding pledge to maintain record-low borrowing costs.

Data Tuesday showed consumer-price growth hitting 4.8% in May, compared with a year earlier, the highest level in a decade. The zloty jumped to a 2021 high against the euro on bets that policy normalization may begin sooner than anticipated.

Polish authorities are increasingly worried that a 5% rate would fuel public inflation expectations and undermine price stability for longer, according to three people familiar with the thinking of the central bank and government officials, who asked not to be named because they weren’t authorized to speak on the subject.

Inflation Spike Near 5% Trips Alarm for Polish Policy Makers

An advance to that level -- deemed a psychological barrier -- would buoy the hawkish minority on the Monetary Policy Council, though it’s unclear whether that would translate into any near-term policy reaction, the people said before the latest inflation figures were published. The MPC will next meet on June 9.

While Poland has one of the European Union’s highest inflation rates, it’s so far opting not to follow regional peers including Hungary and the Czech Republic in signaling imminent rate hikes. The European Union’s biggest eastern economy has worked hard to curb price growth, which peaked at 100% per month during the volatile early 1990s and stood at annual 8.5% at the start of the century.

Governor Adam Glapinski has repeatedly said the latest jumps in consumer prices are temporary and beyond the bank’s control. He’s vowed to keep the benchmark rate where it is for the coming months as Poland’s post-pandemic revival takes priority.

Mounting Pressure

But pressure is mounting to alter that stance.

“The MPC should soon change its rhetoric to clearly less dovish,” said Ernest Pytlarczyk, chief economist at Bank Pekao SA in Warsaw. “The threats to economic recovery have been decreasing amid vaccination progress and the global rebound, while the risks associated with excessive inflation have been increasing on supply-side bottlenecks and the tight labor market.”

Monika Kurtek, the chief economist at Bank Pocztowy SA, said that “nothing indicates that inflation will return anywhere near” the central bank’s target range of 1.5% to 3.5%, predicting CPI will remain above 4% in the coming months.

Adam Antoniak, a senior economist at Bank Pekao SA, said it will be “increasingly difficult for the MPC to find arguments for keeping near-zero rates,” while ING Bank Slaski SA analyst Dawid Pachucki sees a majority in favor of policy normalization building “gradually” on the 10-member panel.

June Move?

Some MPC members agree. The panel where Glapinski casts a tie-breaking vote may soon consider a symbolic increase in the benchmark to pump the breaks on price growth and anchor expectations, according to panelists Lukasz Hardt, Jerzy Zyzynski and Eugeniusz Gatnar.

Speaking with broadcaster TV Biznes 24, Hardt said on Tuesday that the MPC should consider a 15 basis-point hike next week.

The yield on the government’s 10-year zloty-denominated note rose to a one-year high in May on concerns over inflation and a potential QE tapering. Tuesday’s inflation data, which showed price growth quickening from 4.3% in April, only add to questions over the sustainability of record-low interest rates.

“History knows many examples of when excessively lenient monetary policy led to really serious perturbations, not only in the economy but also in political systems,” Hardt said in comments published Monday. “If we don’t react gently now, it may be that in a year’s time a symbolic hike won’t be enough.”

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