Poland Raises Rates Less Than Expected to Curb Prices

(Bloomberg) -- Poland’s central bank pledged to continue fighting inflation after its interest-rate increase fell short of market expectations and weakened the zloty.

Policy makers in Warsaw lifted on Thursday the benchmark rate by 75 basis points to 5.25%, the highest level since 2008. Most economists predicted a full percentage-point increase. Future decisions will hinge on the prospects for inflation and economic activity, including the impact of Russia’s war in Ukraine, they said. 

The central bank “will take all necessary actions in order to ensure macroeconomic and financial stability, including above all to reduce the risk of inflation remaining elevated,” according to a statement. Governor Adam Glapinski will hold a news conference at 3 p.m. on Friday.

The campaign of rate increases -- the central bank’s eighth in a row -- has so far failed to slow price growth. Inflation accelerated to 12.3% in April, the fastest pace in 24 years, driven by a spike in energy and fuel prices. 

Prime Minister Mateusz Morawiecki has started calling the price surge “Putinflation,” framing the turmoil as an immediate consequence of the war in Ukraine, rather than potential missteps in local economic policy making.

The war is fueling inflation across the Europe Union’s east. In neighboring Czech Republic, the central bank on Thursday raised the benchmark by 75 basis points to 5.75%, more than expected. 

The zloty slid following the Polish decision. The central bank repeated that a strong zloty would act to curb inflation and that it was ready to intervene on the currency market. The zloty dropped 0.9% to 4.6904 per euro at 5 p.m. in Warsaw.

More Needed

The rate increases in Poland are starting to put a strain on some consumers. The government last month rolled out an aid plan for mortgage borrowers. And borrowing costs may continue to climb -- Russia has halted gas deliveries to Poland, which could stoke a further rise in energy prices.

More than 3 million refugees who arrived in Poland from Ukraine as a result of the war have also boosted demand, with additional price pressure coming from rapidly rising government spending. 

Policy makers have so far given no indication that they are close to ending the rate increases. Przemyslaw Litwiniuk, a member of Poland’s rate-setting body, told Bloomberg last month that more rate increases are needed to keep inflation expectations in check.

“Further large hikes are likely to be needed to deal with the country’s growing inflation problem,” said Liam Peach, emerging Europe economist at Capital Economics. “We remain comfortable with our forecast that interest rates will rise to 7.5% by the end of this year, which is a more hawkish view than most hold.”

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