Hot spots: Poland.(Central Bank raises interest rates)

Late in August--and unexpectedly for the financial markets--Poland's Central Bank raised interest rates for the third time in as many months, by half a percentage point. This put the so-called Lombard rate, which the CB charges to banks borrowing overnight with government securities as collateral, up to 8.0 percent from 7.5 percent. The discount rate, which functions as a reference rate for some bank loans, was hiked concurrently to 7.0 percent from 7.5 percent.

The monetary authorities have been worried about inflation ever since the escalation of consumer prices in June began to overshoot the 2004 target of 3.5 percent with 0.9 percent for the month and 4.4 percent year-on-year. The Central Bank's Monetary Policy Council (MPC) raised interest rates on June 30 for the first time since August 2000, and it has been pulling the noose tighter ever since. In July, annual consumer price inflation was up to 4.6 percent, and the MPC evidently worries that there is more pressure in the pipeline. It may have overreacted with its latest rate increase, though, since the economy has already slowed somewhat and since part of the uptick in the consumer price index has had to do with the surge in oil prices. This upward push acts like an extra tax on the economy, to which credit tightening is not exactly the most appropriate response.

Following a robust rise of real gross domestic product by an annual 6.9 percent in the first quarter of this year, the expansion seems to have slowed somewhat, to about 6.0 percent, in April-June. The government anticipates a gain of 5.7 percent for 2004 as a whole, and on current trends, this still appears to be achievable. Exports measured in current zloty prices forged ahead by 38 percent (year on-year) in the first six months of 2004. They outpaced imports, which rose by 32 percent. This did not wipe out the country's (chronic) foreign trade deficit, but it reduced the red-ink spill, which remains quite manageable. Generally, the external accounts pose no real problem at this time, with a current-account balance-of-payments gap that is forecast to shrink to 1.6 percent of gross domestic product this year from 1.9 percent in 2003, and with rising international monetary reserves, which were reported at close to USD 36 billion at mid-year, increased from USD 32.6 billion at the start of 2004.

More importantly, strong exports have propelled industrial production, which in the first semester gained by 17.6 percent from January-June 2003. Manufacturing was up by 21 percent between these two periods, while retail sales grew by 12.4 percent. Withal, a long-awaited revival of investment got under way, as companies increased their outlays on plant and equipment by 9 percent in the first semester compared to the like span of 2003. The main investors have been industrial companies that export a large proportion of their production. They started to hire additional people, and the national unemployment rate fell to (a still-exorbitant) nine-month low of 19.3 percent in July.

In its budget assumptions for 2005, which ...