Poland's central bank surprises with rate hike, bourse falls UPDATE

Poland's central bank surprised markets with a second rise in interest rates in three months at its June policy meeting, judging it needed to act faster than many analysts had expected to cool Europe's biggest former communist economy.

The bank raised borrowing costs for the first time in three years in April, but most analysts had expected policymakers to wait at least until July before moving again.

Bond yields jumped 4 basis points higher on the news. The Warsaw stock exchange's WIG 20 index fell 1 pct, while the zloty currency gained around 0.3 pct.

'The market was positioned almost down the middle on whether they would hike today, so quite a few people have been caught out,' said Maciej Slomka, head of fixed income at Bank Pekao in Warsaw.

Poland's economy grew by a decade-high 7.4 pct year-on-year in the first quarter, pushing inflation up to 2.3 pct in May - close to the bank's 2.5 pct target.

But the pace of growth is expected to have slowed in the second quarter and several bank policymakers argued this month that the bank can take some time to observe the impact of falling unemployment and rising wages on inflation.

Headline consumer inflation in May stood at 2.3 pct, while wages grew 8.9 pct, spurring concerns that a fall in unemployment and booming domestic demand may lead to a rise in producers' costs.

'Today's decision was probably driven by wage growth as well as rising unit labour costs,' said Bank BPH chief economist Ryszard Petru in a note to clients.

'This means the council prefers a forward-looking approach and does not need to wait for CPI to be above 2.5 pct to tighten monetary policy.'

Analysts said they would look to the bank's statement and conference at 4 p.m. CET for signs of whether the early rise in rates was a pre-emptive strike aimed at giving the council time to wait with a next move.

They will seek signals of how the key swing voters on the 10-strong panel will line up in months ahead.

'The group which in May failed to force through a rise in rates this time were likely joined by Professor Jan Czekaj,' said Maciej Reluga, chief economist with Bank Zachodni WBK in Warsaw.

Most said more hikes could now be on the cards this year.

'I would expect two more hikes before the end of this year - but not in July,' Danske Bank analyst Lars Christensen told Thomson Financial News.

'The most notable element is that the swing voters seem to have aligned themselves with the hawks.'

Source: forbes.com