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US bank sees Polish borrowing costs hiked in March

PR dla Zagranicy
Peter Gentle 24.01.2012 16:42
The central bank’s (NBP) relatively loose monetary policy could undergo some tightening in March.


The Bank of America/Merrill Lynch said Tuesday that the NBP is likely to raise rates in the first half of the year by 50 basis points, starting with 25 bps in March.

The NBP’s current benchmark – reference – rate is 4.5 percent, with base inflation at 3.1 percent in December, but proving harder to contain than some had expected.

The US investment bank said last week that it did not expect Poland’s borrowing costs to rise at all this year.

But it said it had changed its position after recent signals from the rate setting council, the RPP.

“Our recent visit to Warsaw strengthened our positive stance on the Polish economy, but at the same time increased concerns about the RPP’s hawkish stance,” the report reads.

The bank said it expected inflation to have peaked but would not fall to anywhere near the NBP’s 2.5 percent target this year or in 2013.

The bank said December’s 3.1 percent base inflation rate was “cause for concern” and that the figure was likely to stay above 3 percent this year.

Bank of America/Merrill Lynch cut GDP growth projections to 2.6 percent from 3 percent in 2012.

The World Bank (WB) said last week that Poland’s growth may slip to 2.5 percent in 2012.

The WB noted reduced fiscal room for manouver, maturing short‐term and long‐term debt, potential deleveraging by banks in the high‐income world, weaker export demand and remittances flows and commodity prices.

Finance Minister Jacek Rostowski has reiterated that the government is on course to meet it budget targets for this year.

However, fears are that slowing growth could hit tax revenues while rising prices sustain strong wage growth demands, also in the public sector.

A central budget deficit of 35 billion zlotys is widely seen as possible, although a 3 percent of debt to the public sector deficit - given the need to rein in spending and the likely impact this could have on growth – is less certain.

The government needs to avoid breaching a debt threshold of 55 percent of GDP, which would automatically trigger stringent budget cuts.

Poland’s public debt is currently close to the 55 percent threshold – a thin line, which, if crossed at the end of this year will force the government to construct and implement a budget without a deficit in 2013.

Weak economic conditions in Greece and Hungary have hit emerging markets in Eastern Europe.

Foreign investors aren’t so keen to keep their money in financial markets here, which leads to a weakening exchange rate in the short run and rising borrowing costs in the long run.

This in turn means that the debt (and its costs) borrowed by the Polish government on international markets, when denominated in Polish zlotys, will rise – and without any real effort by the government to reform public finances the border line of 55 percent of GDP will be easily crossed.(jh)

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