The Monetary Policy Council’s latest report

(This is a text I translated from Polish to English / Tekst przetłumaczony z języka polskiego na angielski)

The Monetary Policy Council’s latest report presents an assessment and evaluation of the conduct of the macroeconomic processes influencing inflation.

According to July’s forecast the anticipated growth of consumer prices in the next 8 quarters will be higher than predicted in April. Assuming interest rates will stay flat, there is a 50% chance that inflation in the 4th quarter of 2007 will be in the range of 2.3-3.3%.

According to the MPC’s prediction, the pace of economic growth in the coming quarters will be faster than the potential growth rate of GDP. The latest information about the labour market shows continuing growth in wages and a deterioration of the relationship between the rise of remuneration and productivity. It is possible that wage pressures will continue to grow and, consequently, inflationary pressure will surge. The Council recognised that the inflation growth in the medium term can be limited by an increase of productivity and the favourable financial situation of private businesses. The rise in inflation in the medium term can be also limited by the low growth of external prices, because of monetary policy conducted by major central banks and globalization accompanied by an increase of competition in in the market for goods and services traded internationally.

The Council predicts that the probability that inflation will run above the inflation target decreased, to some extent, as a result of the previous tightening of monetary policy, although it is still higher than the probability of inflation being below the target.

According to the forecast, GDP growth in 2007 will reach 6.4%, and in the following years be around 5.5%. Anticipated economic growth for 2007 is consistent with the April projection, but will increase in the years 2008-2009. The pace of investment will reach 20% in 2007 and in following years will be significantly above 10%. A favorable outlook for sales and a relatively low capital cost will be the source of high investment demand from businesses.

Growth of investments will be accompanied by a foreign capital influx in the form of direct investments and funding from the EU. Favorable economic growth prospects will also be the main driver of the increase in demand for work.

The dynamics of numbers employed will reach 4% in 2007, stabilizing at slightly below 2% in the following years. As a result, the unemployment rate will drop more sharply than anticipated in April and reach around 8% in the last quarter of 2009. A rapid decline in unemployment will have the effect of increasing wage pressure and consequently, the projected real wage growth will exceed the growth in labor productivity in the economy.

The forecast for average growth in nominal gross wages will reach 7% in 2007, which will increase to approximately 7.5% in 2008, and then drop to approximately 6.5% in 2009.  Investment growth and the increase in consumption indicates that growth in domestic demand will increase by approximately 8.5% in 2007 and on average 7% in 2008-2009. If there is no change in the NBP’s (National Bank of Poland) interest rates then the inflation target will be outpaced in the 4th quarter of 2007.

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