Poland Raises Benchmark Rate for 2nd Time This Year (Update2)

Poland's central bank unexpectedly raised its key interest rate for a second time this year on concern wage growth will force companies to boost prices.

The central bank-led Monetary Policy Council lifted the benchmark seven-day reference rate a quarter point to 4.5 percent today. Nineteen economists in a Bloomberg survey expected no change, while five others forecast a quarter-point increase.

The $350 billion economy, which makes up more than third of the European Union's eastern members, grew 7.4 percent in the first three months of the year, the fastest in a decade, and may expand 6.5 percent for the year. Central bankers last raised interest rates in April on concern falling unemployment and rising wages will boost inflation.

``It is possible that wage pressure will continue to grow, strengthening inflation pressure,'' the council said in a statement after the meeting.

The council said inflation may temporary slow in the third quarter, helped by the healthy financial standing of companies and growing competition among service providers and goods producers. The inflation rate, at 2.3 percent in May, is nearing the central bank's mid-range target rate of 2.5 percent.

Mid-Term Concern

``It may not be enough to curb inflation in the mid-term,'' the council said. ``The probability that inflation will grow above the target in the mid-term is higher than the probability that inflation will be below it.''

The zloty extended gains after the decision, trading at 3.787 at 4 p.m. in Warsaw, up from 3.7943 in reaction to the decision and above yesterday's close of 3.7974. The yield of the 4.75 percent benchmark government bond due in April 2012 rose 2 basis points to 5.51 percent.

``The balance of power tilted toward the hawkish side, probably due to the situation on the labor market,'' said Jacek Wisniewski, an economist at Raiffeisen Bank in Warsaw. ``We may expect at least one more hike this year, probably by September.''

Average corporate wages rose 8.9 percent in May from a year before, while employment gained 4.4 percent, sparking concern producers may raise prices. Unemployment declined in May to 13 percent, close to an eight-year low, after the economy grew in the first quarter at the fastest pace in a decade.

April Decision

The Monetary Policy Council in April raised the benchmark seven-day reference rate by a quarter point to 4.25 percent after keeping it unchanged at a record low for 14 months. At the time, inflation was below the bank's target.

The annual inflation rate was 2.3 percent in May, close to the central bank's target of 2.5 percent. Forward-rate agreements show markets expect the bank to raise rates by 50 basis points within the next three months.

Source:By Monika Rozlal and Dorota Bartyzel, bloomberg.com