WARSAW (Thomson Financial) - Polands central bank may raise interest rates once more this year but the path of policy next year is unclear and it is too early to say whether expectations of more tightening in 2008 are justified, a central bank policymaker said.
Andrzej Wojtyna, a moderate on the 10-strong council who has voted for rises in rates this year, told Thomson Financial News he was increasingly concerned by rises in public spending promises ahead of general elections in October.
He warned more loosening of fiscal policy could force the bank to tighten monetary pursestrings further.
For now, he said price pressure likely to result from strong, steady growth in wages was more important to policymakers than a surprisingly sharp dip in inflation in August.
'Taking into account inflationary pressure I believe that one more rise this year is possible,' Wojtyna said.
Asked if more tightening would be needed in 2008, he said: 'At the moment we do not know. We cannot say for sure that markets' expectations on rates will actually show up in the form of further hikes.'
Most analysts expect the bank to make one more rise this year and follow it with two more 25 basis point hikes in the first half of 2008. It has raised its main rate 75 basis points this year to 4.75 pct.
Asked if it was possible one more hike would be enough, Wojtyna said: Its difficult to say. We have elections in front of us, we will see what government comes out of them and what economic program they put forward. Neither do we know what will happen externally.'
Polands conservative government has upped its long-term spending commitments next year ahead of polls on Oct 13, including a 6.5 bln zloty tax break for couples with children.
Markets have been buoyed by a deficit undershoot this year, but analysts warn the rise in stiff spending commitments in the budget stores up trouble for any slowdown in growth in years ahead.
'In an election year, the risk is rising of overly expansive budget policy,' Wojtyna said. 'It would be good if changes like the rise in pro-family tax breaks were accompanied by pro-reform moves.
'It would not be good for budget policy to become yet more expansive, since this would make it necessary to raise rates further, and result in a sub-optimal policy mix of overly restrictive monetary policy and excessively expansive budget policy. This may generate unneeded tensions in the economy.'
Wojtyna said he was concerned by recent rises in Polands previously low current account deficit against a background of increased volatility on global financial markets.
He also saw risks of continuing rises in food prices, one driver of higher inflation this year, and said the bank would have to remain vigilant to avoid second-round effects on other prices.
'The structure of spending is also important; food is still an important part of the inflation basket,' he said. 'Some experts believe that rises in prices (this year) do not have to be one-offs, they may continue next year.'
Yet he also gave credence to many of the arguments of the councils dovish arm, who argue that rising competition and an investment boom dating back more than a year may cool inflation next year.
'Wages and inflation pressure are rising. But investment has been rising strongly for more than two years. From the demand side, investments should already have a positive effect in terms of rises in labour productivity, lessening inflation pressure, he said.
'However, we do not know which factors will win out and what will be the final net effect in 2008.'
Source:By Patrick Graham, forbes.com
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