Polish economy proves its resilience

A long expected move has just been made. After nineteen months of standing at 3.50% benchmark interest rate of Polish Central Bank was raised by 25 basis points. The decision taken by Monetary Policy Council was anticipated by financial markets.

Thus Poland joined the group of countries where monetary tightening has got under way. The prudent step confirms Polish economy is back on the growth track and in the middle term inflation poses a bigger threat to macroeconomic stability than low pace of GDP growth. Quite probably this year we will witness three interest rate hikes, each by 25 basis points, so at the end of the year the benchmark rate will reach 4.50%. This series of gentle increases will not hamper economic growth, but will ensure price stability (conducive and indispensable to sustain long-term growth) and will head off the risk of overheating the economy. In the long term I expect Polish central bank to focus mainly on inflation data; pace of economic growth will recede into background.

Markets have already discounted the hike. FRA quotations had indicated one hike in 2010, so according to the markets, the decision was belated. Valuations of bond funds and money market funds, both sensitive to interest rate movements (correlation is negative) were down in the recent weeks (bond funds), or levelled off (money market funds). What was felt by participants of "safe" investment funds will soon affect borrowers who have taken out variable-rate loans (that applies to mortgage loans denominated in PLN as well). Mortgage borrowers whose debts are denominated in foreign currencies can expect, holding everything else unchanged, slightly lower installments, as rising rates should cause zloty to appreciate. Interests paid by the banks for time deposits and saving accounts will pick up, but here you ought to expect a considerable lag - banks are not hard up for cash and will not pay over the odds for your savings.

Today WIG20, the main index of Warsaw Stock Exchange hit its many months' high and climbed to levels last seen in summer 2008 (and subsequently plummeted). In the short term I expect stock prices to go up, in the mid-term a correction by round about 10% would be quite natural, my target for the end of the year is 3,200 points (WIG 20). I will look back on these forecasts at the end of the year, to check how accurate they were.

In the meantime I took a glance at comment threads following the news items informing about the hike. Commentators either fulminate against prime minister Tusk and the ruling Platforma Obywatelska (as if they were responsible for the move) or blame conspiracy of foreing banks, all in league to fleece poor Poles... Thoughtless comments, which by the way are indispensable part of the Internet (educated people have little time to comment), remind me that Poles' grasp of mechanics of economics still needs to be worked on...