ForexSpace.com - Having seen it economy growing at 4.3 percent last year, with 2012 growth expected to slow to around 2.5 percent, Poland's central bank unexpectedly hiked its interest rates by 25 basis points. Clued up analysts, forex traders and top forex brokers believe the bank was compelled to rein in stubbornly high inflation, despite indications of an economic slowdown. The bank's Monetary Policy Council increased its key policy rate PLINTR=ECI to 4.75 percent, breaking a spell of unchanged rates that lasted for the past 10 months. Currency guru and political economist, Marc Chandler (pictured), insists move surprised the markets.

“While the central bank had warned that a hike was possible,” Chandler tells us, “most, like ourselves, expected the hike next month. As one would expect, the zloty rallied on the news.”  Certainly the central bank was responding to rising price pressures and the relative resilience of the Polish economy - the only one in the European Union to sidestep recession during the current crisis – in the face of developments in the west. Commenting, Societe Generale in a client note said that further rate hikes look in the offing; another 25bps is anticipated for midyear.

"Emerging Europe is tightly linked into the unraveling European situation [but] Poland, [and the zloty,] is the outperformer amongst the [EM region]," said SG. Poland’s currency, the zloty, gained 0.2 percent immediately after the decision, but later conceded ground as dealers said the market was expecting the Council may need to reverse the hike soon, given mounting euro zone worries. By mid-morning, the zloty traded at 4.217 to the euro, 0.2 percent weaker on the day according to live forex charts. Interest rate swaps fell 10 basis points after the decision.

Traders had pared expectations for a rate increase before the decision, with the premium on three-month interest-rate forward contracts over the benchmark Warsaw interbank offered rate falling to a one-month low of seven basis points on May 4 from 19 on April 18, according to data compiled by Bloomberg. The extra yield on Polish two-year bonds over similar-maturity German debt has decreased 15 basis points in four weeks to 450 basis points, or 4.5 percentage points, the data show.

Drew Hillier. Editor