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The Warsaw Voice » Business » May 14, 2008
INFLATION
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Edging Up
May 14, 2008 By Andrzej Ratajczyk   
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If it continues to rise, inflation may cause the Polish economy to slow.

Poland's consumer price index (CPI) increased by 0.4 percent in April, making year-on-year inflation rise to 4.1 percent, according to the latest data from the finance ministry. Despite this Finance Minister Jacek Rostowski says that for the time being there is no reason to change the ministry's average annual inflation forecast of 3.5 percent for 2008 and 2.9 percent for 2009. However, Rostowski admitted that there are reasons to expect that inflation will overshoot these targets this year.

For now, the Polish economy is still growing fast-at an annual rate of 6.5 percent last year and around 6 percent in the first quarter of this year, according to preliminary data-but in 2008-2010 real GDP growth may decline to around 5.5 percent, experts say. The decline may be caused by factors such as slower GDP growth in the United States and the eurozone. High inflation may jeopardize the anticipated fast GDP growth both this year and in following years. Hopes that inflation will stay low in the coming years and close to the central bank's inflationary target of 2.5 percent, with a possible deviation of 1 percentage point either up or down, may prove to be unrealistic, some experts say. Many groups of workers in Poland keep demanding higher wages and, while this is not the only inflation-causing factor, an inflation rate of over 4 percent in 2008 seems a realistic prospect.

Sławomir Skrzypek, governor of the National Bank of Poland (NBP), has said that inflation will probably continue to rise in the coming months, only to return to the NBP's target level in late 2009 or early 2010. In February, the NBP said it expected the inflation rate to stabilize at around 2.5 percent in 2010 at the earliest.

Jacek Wi¶niewski, chief economist at Raiffeisen Bank, says inflation will peak at nearly 5 percent in July or August, only to drop to some 4 percent at the end of the year. "A lot will depend on the prices of food," he says. "The Polish food market is now completely open and even good crops at home do not guarantee low food prices. There must be good crops worldwide, because food prices depend on global factors."

Marian Noga from the Monetary Policy Council (RPP) says inflation will rise to 4.8 percent in August and then drop to 4 percent by December. He says another interest rate hike is needed, in June at the latest. So far, the RPP has raised key interest rates three times this year, in January, February and March, in addition to four hikes last year, by a total of 175 basis points. In April, the RPP did not change the rates. The NBP reference rate currently runs at 5.75 percent.

Analyses by World Bank experts indicate a risk of higher inflation in Central and Eastern Europe over the next few years. The experts say this is primarily due to more restrictive criteria in granting loans, which may slow down GDP growth in the region. Inflation will also gain momentum because, in many countries in the region, Poland included, real wages are growing faster than productivity.

The International Monetary Fund expects that inflation will stay at around 4 percent in Poland, one of the better results in the region. In the Baltic states, for example, inflation has already overshot 10 percent.

The European Commission has warned Poland against high inflation. In its late April economic forecast for EU member states, the commission highlighted a significant growth of inflation in Poland in the last quarter of 2007, resulting from higher food and energy prices. European Commission experts predict that these factors, coupled with expected wage raises, will make inflation in Poland rise to 4.3 percent.

Inflation is spiraling all across the European Union. In April, inflation in the euro zone was 3.3 percent year-on-year, down from 3.6 percent in March, according to Eurostat, the EU's statistical office. "We are experiencing a very difficult time, particularly in terms of inflation," said Joaquin Almunia, EU commissioner for economic and monetary affairs. He added that the inflationary pressure in the EU was "a cause for concern in both the economic and social contexts." In most of the countries, inflation is the result of not only external pressure, he said, but also the poor functioning of the market, the absence of structural reforms and insufficient competition. At the same time, the weakest nations are hardest hit as a result of that, Almunia said. He warned EU member governments against giving in to trade union pressure for higher wages, as this may boost inflation and cause a further drop in the purchasing power of the population.

Meanwhile, the European Commission has revised upward its 2008 inflation forecast for the eurozone, from 2.6 percent to a record 3.2 percent. The commission has also lowered the eurozone's economic growth forecast from 1.8 to 1.7 percent in 2008, followed by 1.5 percent in 2009. The commission expects that this year average inflation in the EU will be 3.6 percent, with GDP growth at 2 percent. The good news is that inflation is expected to slow down in the second half of this year. The commission's inflation forecasts for 2009 are better: 2.2 percent for the eurozone, 2.4 percent for the EU as a whole, and 3.4 percent for Poland.

In a recently published forecast for the European economy called CEE Economic Data, analysts from UniCredit Group/Pekao predict that inflation will keep falling in Poland, from 4.6 percent this year to 2.6 percent at the end of 2009, and 2.3 percent in 2010.
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