Inflation rate blocks eurozone

Poland is hoping to adopt the euro as its currency in 2012, but if the current annual inflation rate of 3.03 percent continues, the EU won’t allow it to make the change.

The EU has an inflation formula for new members that want to adopt the euro: Inflation must be no more than 1.5 percentage points higher than the average rate of the three EU countries with the lowest inflation.

Last year, the average inflation rate of the countries with the lowest rates – Malta, the Netherlands and Finland – was about 1.4 percent. That means that Poland must have an inflation rate in the 2.9 to 3 percent range to meet the EU requirement.

The daily newspaper Rzeczpospolita said Poland’s inflation rate in January was 4.1 percent, however. And in February it is expected to be 4.4 percent.

The EU uses the inflation rate over the previous 12 months as one of five yardsticks for determining whether a new-member country can switch to the euro.

If the February inflation rate is 4.4 percent, then the rate for the 12 months ending in February will be 3.03 percent, or a fraction more than what the EU demands, Rzeczpospolita said.

“I estimate that we won’t fulfill the inflation-rate condition in February,” Professor Marian Noga, a member of the Council for Monetary Policy, told Rzeczpospolita.

Minister of Finance Jacek Rostowski agreed. He said the government will try to reduce inflation in months to come.

Poles are painfully aware of inflation. The price of electricity has risen 12 to 13 percent over the last year. Gas prices have risen 10 percent.

The price increase that is most noticeable to consumers, however, is in food because food accounts for a quarter of all household expenditures. The inflation rate for food has been about 7 percent.

The high inflation rate also discourages those who are considering investing in Poland.

Poland meets all of the criteria for adopting the euro except inflation, said Ernest Putlarczyk, a Warsaw-based economist for BRE Bank. Besides the inflation rate, the EU looks at a country’s long-term interest rate, the annual increase in government debt, the over-all size of the government deficit and the currency exchange rate.

Although inflation is the only criteria that Poland doesn’t meet, it is enough to give investors pause, he said.

The Council for Monetary Policy is not only trying to stem inflation in commodities and services, but also in interest rates.

Since last year the interest rate has increased about 1.25 percentage points – from 4 percent for an average loan to 5.25 percent today.

The increase means that a person with a new 100,000-zloty mortgage will be paying 1,250 zloty more in interest each year than a person who took out the same-sized loan last year.

Although some economists decry inflation, others see it as a signal of good economic growth.

“The exponential inflation rate proves that the Polish economy is developing at a good rate,” said Piotr Kalisz, a Warsaw-based economist for Citibank. Last year the Polish economy grew at a 6.1 percent rate.

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