Poland, Czechs Set to Lift Rates as Prices Surge: Decision Guide

(Bloomberg) -- Poland and the Czech Republic are poised to drive borrowing costs up further to curb quickening inflation, even as they begin to send diverging signals about how much more tightening is needed.

The Polish central bank will probably raise its key rate by a full percentage point to 5.5% on Thursday, according to the median estimate in a Bloomberg survey. Policy makers in Prague will likely increase their benchmark rate by half a percentage-point, bringing it also to 5.5%. If delivered as expected, it will be the first time in two years that the key rate in both eastern European nations converge.

The two countries are grappling with the fastest inflation in nearly a quarter century as Russia's invasion of Ukraine has driven up prices for energy and raw materials. While the war is also likely to hurt growth, central bankers have been more concerned about high consumer prices becoming entrenched in the economies for longer.

In Hungary, the central bank is expected to leave its effective rate at 6.45% on Thursday. The bank in Budapest indicated earlier this year that it will hike rates on a monthly basis in the absence of major turbulence on the financial markets.

If the Polish central bank delivers as expected, it would mirror last month's decision, marking the eight increase in a row since the tightening kicked off from 0.1% in October. There is no set time for the rate announcement, and Governor Adam Glapinski will hold a news conference on Friday.

Polish inflation jumped to 12.3% in April, according to a preliminary report, and is expected to accelerate to 13% in the coming months. Average wage growth was 12.4% last month, creating a risk that booming domestic demand will drive prices even higher.

“Recent inflation readings indicate that consumer price growth has spiraled out of control,” said Grzegorz Maliszewski, chief economist at Bank Millennium in Warsaw. “Aggressive interest rate hikes have to continue, especially as data from the labor market indicate the emerging price-wage spiral.”

Accelerating inflation already prompted economists at ING Bank Slaski to speculate that the main rate in Poland could even rise to 10%.

Policy makers in the Czech Republic are also expected to repeat their hike from the previous meeting. But a half-point increase would be another signal of a slowdown in the monetary-policy tightening, after a series of larger hikes between August and February.

Some of the five Czech board members who have backed all the rate increases have recently begun to temper expectations of further moves. Governor Jiri Rusnok said two weeks ago that any further steps should be “essentially cosmetic.”

The Czech decision will be announced at 2:30 p.m. in Prague, followed by a news conference at 3:45 p.m.

Read more: Czech President Says He Is Near Choosing Next Central Bank Chief

Despite the less hawkish tone, Deutsche Bank AG strategist Christian Wietoska in London last week increased his forecast for where Czech rates will peak this year. He set it at 6.5% from 6%, predicting half-point hikes at each of the next three policy meetings.

“We now think that two more hikes are more likely given the worsening external backdrop and increasing risks to inflation,” he said in a report to clients.