Poland Must Raise Key Rates, Wasilewska-Trenkner Says

By Monika Rozlal

Aug. 28 (Bloomberg) -- Poland's central bank should raise the benchmark interest rate once more this year as inflationary pressure persists, policy maker Halina Wasilewska-Trenkner said.

The inflation rate, which rose to a seven-year high of 4.8 percent in July, may reach 5.3 percent this month and be between 4.5 percent and 5 percent at the end of the year, Wasilewska- Trenkner said in an interview in her Warsaw office yesterday.

Narodowy Bank Polski left borrowing costs unchanged in August for a second month, after three increases this year, as policy makers shifted focus from inflation, which has been above the 2.5 percent target since October, to slowing growth. The economy probably expanded 5.6 percent in the second quarter, the weakest since the end of 2005, a survey of economists shows.

``We cannot expect the inflation rate to return to the target any faster,'' said Wasilewska-Trenkner, a 66-year-old former finance minister. ``We cannot wait for the economic growth slowdown to resolve the problem.''

The zloty fell to 3.348 to the euro by 3:10 pm in Warsaw from 3.337 yesterday.

The six-month Polish Forward Rate Agreement traded below the three-month WIBOR interbank rate, suggesting the central bank may start cutting interest rates next year. The FRA traded at 6.29 percent today, or 20 basis points below the WIBOR level of 6.49 percent.

Global Slowdown

``A slightly more hawkish communiqué from the Council and comments by its members are enough to limit expectations for cutting interest rates,'' said Mateusz Szczurek, the chief economist at ING Bank Slaski in Warsaw.

While the U.S., the U.K. and euro-region economies are expanding at slower rates than the Polish central bank projected, the domestic economy is not cooling as fast expected, Wasilewska- Trenkner said.

The Finance Ministry forecast the Polish economy grew 5.7 percent in the second quarter after a 6.1 percent expansion the quarter before. Growth figures will be released tomorrow.

The next inflation projection due in October may not be more optimistic about the outlook for price growth, even as oil prices fall and food prices rise at a slower pace than in past months.

The zloty, one of the strongest emerging-market currencies since the beginning of the year, is no longer helping keep inflation under control after ranking as the worst-performing in emerging markets this month.

Zloty `Umbrella'

Strong currencies typically cap import price growth.

``The zloty is still strong and helps in the fight against inflation but this protection umbrella over prices is a bit smaller than it used to be,'' she said. ``The climate shaping inflation has not changed much but the sum of all the factors is less positive.''

She suggested that policy makers continue their ``restrictive bias,'' meaning they are more likely to lean toward higher, rather than lower, rates.

One rate increase may suffice, she said, as anything more may ``violate the economic balance. Two more hikes this year would not be recommended.''

The economic slowdown ``will not lead immediately to a wage and price decline so we cannot say that we are nearing the end of the tightening cycle,'' she said.

The question of raising rates this year will ``dominate'' the debate, Wasilewska-Trenkner said.

``It would be good if we could start lowering interest rates several quarters from now, but it is too early to debate on that, at least not in the next one or two quarters,'' she said.

To contact the reporter on this story: Monika Rozlal in Warsaw at mrozlal@bloomberg.net.