Nobody seems entirely sure why Polish inflation is still so low given the booming economy, soaring wages and growing consumption. Few believe it will last.
Expectations that price growth will accelerate mean the central bank's Monetary Policy Council has room to keep raising borrowing costs despite the fact that inflation remains well below the central bank's target.
"In the long term, it is hard to imagine we will be a miracle economy, able to avoid inflation despite the boom," said Rafal Benecki, senior economist at ING Bank in Warsaw.
"The council should act further because the assumption that inflation will not grow beyond the central bank's 2.5 percent target is risky," Benecki added.
Central Europe's biggest economy, which expanded 6.7 percent in the second quarter of this year, has so far avoided bigger inflation threats despite soaring wages and rising consumption.
That raises the question whether the central bank can afford to keep interest rates flat or could hike again soon.
The strong zloty, cheap imports, productivity growth and investment are all seen as factors that have helped keep down inflation so far.
The consumer price index rose just 1.5 percent in August year-on-year, well below expectations as well as the central bank's target in the former communist country of 38 million
That, together with dovish comments from some rate setters, have cooled expectations for further hikes in borrowing costs after three quarter-point rises this year that have taken the main interest rate to 4.75 percent.
The shift of attitude is evident in the bond market which started to price in 50 basis points more in hikes compared with a previous 75 basis points by mid-2008.
Also global markets are keen to see any signs of monetary easing amid a global credit crunch.
PRESSURES
But there are signs of possible inflation pressures building -- wages are rising faster than industrial production and productivity, and unemployment is at 12 percent from around 20 before Poland joined the European Union in 2004.
Some believe low inflation is largely the result of a time lag between growth and prices, meaning that a spike should be expected.
"I am very surprised that price growth has been subdued so far. It is difficult to imagine that Poland will luck out and see no inflation pick-up amid the booming economy," said Raiffeisen bank's chief economist in Warsaw, Jacek Wisniewski.
"I think the central bank should raise rates more, even if it is 'just in case'. Whether the statistics office sees inflation or not, the economy in the long term may be affected if it proves that its data is slow in reflecting real processes."
But not all are convinced the council will respond with more hikes and believe it could allow more time to see whether slowing economic growth next year in Poland -- and the rest of the world -- help ease the inflation pressures.
The council also wants to be wary of putting rates up too far, too fast. Poland went through years of stagnation before its entry into the European Union helped trigger the boom.
"The council has time to observe developments. It can afford a wait-and-see policy for a few months as both inflation and core inflation is low," said Ryszard Petru, chief economist at Bank BPH.
"In time it will become clearer what is happening to the world economy. And although it is not clear now whether there will be no more hikes for sure, the council can enjoy relative comfort for some time to come."
Source: By Karolina Slowikowska - Analysis,
