Sunday, July 20, 2008

Poland's June Industrial Output Rebound and Tame Producer Prices Lower Rate Rise Prospects

Expectations the Polish central bank would increase rates in the coming months eased back slightly this week following better than expected producer price numbers, and a rebound in industrial output which was lower than analyst expectations. And this despite the fact that consumer price inflation continues stuck significantly above the banks target.




According to data released by the Polish statistical office Poland's industrial output rose 7.2 percent year-on-year in June (see chart above), while the rate of increase in producer prices held constant at 2.7 percent year-on-year (see chart below).



Folllowing publication of the data Monetary Policy Council member Andrzej Slawinski is quoted as saying that the level of interest rates would now largely depend on the zloty.

"What is going to happen with the interest rate level will largely depend on the changes in the zloty exchange rate," Slawinski, seen as a moderate on the 10-member MPC, speaking to TVN CNBC.

The zloty - which was little changed after the data - has gained almost 4 percent against the euro in July alone and is up more than 10 percent since the start of the year.


Poland's Monetary Policy Council has raised rates eight times since April 2007, bringing the key rate to the current 6.0 percent in response to the booming economy, growing inflation and a tight labour market.




June consumer inflation stood at 4.6 percent year-on-year, above the central bank's 2.5 target.



However, not everyone is convinced about the inflation outlook, and Halina Wasilewska-Trenkner, a hawk on the 10-strong policy panel, told daily Rzeczpospolita during last week that although the zloty was probably too strong it was difficult to determine the level of excess, and hence the bank should continue to tighten monetary policy.

"Maybe growth is not as dynamic as last year but it is still robust growth," she said.... "I think that in the second quarter it could have been at about 5 percent but there is still a chance that the result for the whole year will be slightly higher. I believe that we should tighten monetary policy more,"

Also monetary policy maker Dariusz Filar argued on Friday that the Polish central bank should immediately raise its main interest rate by at least a quarter of a percentage point to cap inflation. The new core inflation rate, introduced three months ago, and which strips out food and fuel prices (thus giving a better reading on the state of domestic demand) - was probably a "bit too high'' in June (at 2.2 percent) and thus Narodowy Bank Polska's 6 percent seven-day reference rate was not enough to adequately cap price growth.

``That's why an immediate reaction is needed,'' Filar said in an interview on Friday in Warsaw. ``Waiting too long with a change of interest rates may cost us in the future in the form of a higher inflation rate.''


Central bank policy maker Halina Wasilewska-Trenker has also added her voice to the debate. Wasilewska-Trenker stated in an interview with a Polish news agency this weekend that Poland's 6 percent interest rate should be raised as slower-than-expected industrial output data last month provided no proof of an economic slowdown. ``Eonomic growth is still robust,'' ....Poland is ``far from a rapid slowdown,'' she added.

Monetary Policy Council member Marian Noga also feels the Polish central bank should raise interest rates even as economic growth slows because accelerating inflation is only going to prompt demands for higher wages. Noga alos expects freeing energy prices as of next year will drive up inflation to almost 5 percent in January before slowing to below 3.5 percent in the middle of 2010.



``The faster-than-expected economic slowdown would have dismissed the need for interest rate increases if wages hadn't risen at such a quick pace,'' said Noga in a July 18 interview. ``Since second-round effects have emerged, policy tightening must be continued.''


``We realize that our decisions impact on the zloty but it can't be an obstacle for us,'' Noga said. ``It's not the zloty behind the slowdown, but the weakening global economy.''


Poland's Monetary Policy Council has ten members in total.
Posted by Edward Hugh at 2:19 AM

1 comments:

debrann said...

I do not know how to say, just be themseleves

^^Gothicmingle^^c0m

July 20, 2008 7:12 PM

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Spotlight On Hungary

Welcome to the Eastern Europe Economy Watch Blog. By clicking the older posts link (at the foot of the page) you will be able to leaf through the normal chronological blog posts. But first we have our country of the month feature where we would like to present some charts which provide background data we hope will help the first time reader better assess and get to grips with the general argument being presented on the blog. Below you will find charts for Hungarian male life expectancy, fertility, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Please click on thumbnails for better viewing.

On the left you can see a chart for Hungarian male life expectancy, and on the right there is one showing Hungary's population development. Just why such factors are important, and need to be taken into account along with more standard macro economic data in order to understand what is currently happening in Hungary and what might subsequently spread across Central and

Eastern Europe can be discovered by reading my Hungary analysis:Just Why Is Hungary So Different From the Rest of the EU 10?The basic arguments being advanced here are that long term fertility and life expectancy do matter, since in the long run they condition the labour force and consumption patterns, and with these inflation and internal demand.



Above left you can see Hungarian ferility, and above right the evolution of the population median age, which are also key parameters, since they influence saving and consumption, and with these internal demand growth. On either side here you can see charts for inflationand quarterly GDP.


Next on the left we have a chart for recent movements in private internal consumption (which shows us the state of internal immediate consumption demand) while on the right we can see changes in constuction activity, (which serve as a nice proxy for fixed capital formation). Finally the chart on the bottom left shows a comparison of Hungary's trade balance 2006 and 2007,


while on the right you can see the evolution in non-forint mortgages for immediate consumption purposes. Arguably these are all the data points you need to understand my lengthy post on why we face a possible recession in Hungary, and why post-recession Hungary may be converted into yet another export dependent economy.


2008 Forecasts: The OECD in December revised their 2007 Hungary forecast down to 1.8%, and 2008 to 2.6%. These numbers are very hard to accept. I will be very surprised if we see calendar year 2000 as high as 1.8%, but more to the point 2.6% seems to be assuming a strong rebound, an assumption for which there is no real substantive evidence. In particular even to get what growth we have been getting in 2007 the Hungarian govenment has been running a deficit of around 6% of GDP. This is going to tighten yet further in 2008, so there is no supportive fiscal environment. And as I keep arguing, it is very hard to see a supportive monetary one. The IMF in their October World Economic Outlook also put a similar figure of 2.7%, while the EU commission in November 2007 came in with the same 2.6% as the OECD.

Perhaps the prize for the most exaggerated prediction here must go to GKI Gazdaságkutató Zrt, who argue that Hungary should expect the incredible annual growth rate of 3.5%. My own view is much more nuanced. I think I am reasonably confident in holding to my recession forecast for 2008, although of course, "recession" does not mean negative growth for the whole year (technically it is simply 2 consecutive quarters of negative growth), so we might then go on to see what, between 0.5 and 1% growth over whole year 2008 (and the only really doubt is whether the contraction starts in Q4 2007, or in Q1 2008). But it is what happens in 2009 and 2010 that matters really, and at this point so many variables are in play (and interrelated ones to boot) that I can only say I envy those who have the courage - or the temerity - to stick their necks out). And of course, if we get a large correction in the value of the forint, then all those carefully weighed and weighted forecasts will, without a shadow of a doubt, go straight and directly off into the bin.