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Bad news for holidaymakers planning to come to Poland?
Zloty climbs to record as Poland hikes rates
NEW YORK (MarketWatch) -- The Polish zloty surged to a record high against the euro on Wednesday, gaining after Poland's central bank hiked interest rates in an widely anticipated move to tackle rising inflation.
The National Bank of Poland raised its key interest by a quarter of a percentage point, to 6%, in what marked its eighth hike in a monetary-tightening campaign that began in April 2007. Analysts expect the central bank to continue raising rates until at least the end of the year, in response to accelerating inflation, soaring wages and a booming economy.
Following the rate hike, Poland's currency, the zloty, hit a record high of 3.3542 against the euro, beating the previous record of 3.3265 reached in June 2001.
The zloty also traded up 0.5% against the U.S. dollar.
Alongside other regional currencies, the zloty has risen for much of the year, gaining 7% against the euro so far in 2008. The Hungarian forint has gained 7% against the euro, the Czech koruna is up 9% and the Slovakian koruna is up 10%.
"I think people feel that with inflation still on the rise, the central bank still has some work to do," said Nigel Rendell, a senior emerging markets analyst at RBC Capital Markets, in explaining the zloty's surge. He expects the central bank to raise interest rates to 6.5% by the end of the year.
In Warsaw on Wednesday, the benchmark WIG20 stock index ended up 0.3%.
Inflation on the rise
Poland's central bank said there is a better than even chance that inflation will remain within the range of between 3.8% to 4.7% in 2008, slightly higher than its February projection of 3.6% to 4.7%.
Poland's inflation rate for May stood at 4.4% as measured on a year-on-year basis, up from a 4% pace seen in April and well above the central bank's 2.5% target.
Poland's year-on-year retail sales rose 14.9% in May, in line with expectations, and unemployment fell to 10%, nearly a 10-year low.
Policymakers stand firm in their assessment that "in the coming months, inflation will remain above the upper limit for deviations from the inflation target, which, to a large extent, will be driven by increases of administered prices and high annual growth of food and fuel prices," the central bank said in a Wednesday statement.
It added, however, that inflation could be tempered by good corporate results, high investment growth and zloty appreciation.
"Since we believe inflation is likely to drop significantly in the fourth quarter of 2008 and 2009, we think the [monetary policy council] will probably start monetary easing in 2009," said Citigroup's analyst Piotr Kalisz in a research note Wednesday.
Analysts say Poland's sizable current account deficit, which now stands at about 5% of gross domestic product, could pressure its currency down the road. But this is presently offset by increasing foreign direct investment, which stands at 4.9% of GDP, as well as higher deficits around the region.
"It provides caution, but I can name 20 countries in the world where the deficit would worry us more," said Lars Christensen, chief analyst at the research arm of Copenhagen-based Danske Bank.
The weakening of overall global growth is another factor behind the pressure placed on the zloty.
In April, Poland's exports rose by more than 30% from a year ago.
In the face of these trends, market watchers say they're placing their bets on the Polish currency.
"Even though we think the zloty is still overvalued, it's hard to ask investors to get out as we see it as a safe bet in Eastern Europe," said Danske's Christensen, citing the country's robust economic growth.
"We think the zloty will weaken going forward, but we do not see a sharp fall," he said. "There aren't a lot of alternatives in the region, so if you want a long position that's safe to belong, it's probably in Poland."