Poland raises rates to 14-year high as central bank battles inflation

© Reuters.

By Anna Koper

WARSAW (Reuters) -Poland's central bank hiked its main interest rate to the highest level since 2008 on Wednesday, raising the cost of credit by 75 basis points to 6.00% as it fights levels of inflation unseen in almost a quarter of a century.

Russia's invasion of Ukraine poses a dual threat to central European economies, on the one hand fuelling price growth by disrupting global supply chains and commodity markets while on the other creating the risk of slowing growth as business confidence falters.

"A continuation of relatively favourable economic conditions may be expected in the coming quarters, although a further slowdown of economic growth is forecast, while both the domestic and global outlook is subject to significant uncertainty," the National Bank of Poland (NBP) said in a statement.

Central bankers in Hungary and the Czech Republic have signalled that growth risks mean they will slow the pace of policy tightening.

In May, the National Bank of Hungary (NBH) raised its main interest rate by only 50 basis points, half the pace of rate rises in recent months.

However, after the NBP hiked rates less than expected in May, Governor Adam Glapinski said that this was not a sign of a slowdown in tightening in Poland.

"We think a backdrop of tight labour market conditions and surging inflation will prompt further large hikes at the upcoming meetings," said Liam Peach, Emerging Europe economist at Capital Economics.

Inflation in Poland was 13.9% in May according to a flash estimate from the statistics office, well above the central bank's target range of 1.5%-3.5%.

"Elevated inflation results mainly from a strong rise in global energy and agricultural commodity prices – driven, to a large extent, by the repercussions of Russian military aggression against Ukraine – and earlier increases in regulated tariffs," the NBP said.

Of 20 analysts polled by Reuters ahead of Wednesday's decision in Poland, 15 forecast a 75 basis point hike, four expected 50 basis points and one saw a 100 basis-point increase.