Polish bond soar on CPI well below expectations

Polish bond soar on CPI well below expectations

	Published : Thu, 13 Sep 2007 14:02 By : Agencies Print this Story

WARSAW (Thomson Financial) - Poland's consumer price inflation dropped to 1.5 pct in August, well below market expectations, driving bond prices sharply higher as investors cut back on their expectations for the pace and scale of rises in interest rates.

Statistics office data showed inflation fell to the bottom of the bank's 1.5-3.5 pct target range last month, undershooting finance ministry and market expectations of 1.9 pct.

Bond yields, which fall as prices rise, dropped 10 basis points on the news and some analysts said the bank could now hold off with further rises in rates.

The zloty, which is weakened by the prospect of lower than earlier expected interest rates, fell around 0.2 pct.

'This means that the bump in inflation we expected at the end of this year may not appear. It may hold below the 2.5 pct target,' said Mateusz Szczurek, chief economist with ING Bank Slaski in Warsaw.

The office's data showed clothing and shoes prices fell 7.5 pct year-on-year, while recreation costs fell 2.7 pct and telephone costs 2.4 pct. Food and non-alcoholic drinks rose 3.1 pct year-on-year, while fuel prices also dipped 0.5 pct.

'In general this is the effect of competition on prices in the economy,' Szczurek said. 'The main cause is the drop in internet prices this year, as well as clothing, which has been falling steadily for some time.'

Two members of Poland's central bank policy council were divided on the impact of the sharp drop on future policy.

Miroslaw Pietrewicz, who has voted against some of the bank's rises in interest rates this year, said it was possible that the council would not have to raise rates again.

'These are very good data, they give the council a comfortable position and time to observe the situation calmly,' said 'It may turn out that the rises in interest rates we have made this year will be enough.'

Fellow council member Marian Noga, who has supported the bank's 75 basis points in rises to date, maintained his call for rises in rates to 5.5 pct by the middle of next year.

This was in line with the expectations of most analysts before today's data.

'These numbers do not change the picture and my view,' Noga said.

The central bank's 10-strong council meets to discuss interest rates on Sept 25-26.

adrian.krajewski@thomson.com *48 22 447 2430

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