Rate hike on the cards?

Bank policymaker Halina Wasilewska-Trenkner said that any rise in the zł.30 billion budget deficit could prompt higher inflation, forcing the bank to raise interest rates.

"[A rise in the deficit] might mean that interest rates would have to be raised and that we will have higher inflation," Wasilewska-Trenkner told private radio PiN.

The government is struggling to maintain the promised deficit cap in the face of spending demands from its coalition partners. The markets remain nervous, and the złoty and bonds both lost ground after the comments.

Last week central bank governor Leszek Balcerowicz renewed his criticism of a shortage of fiscal discipline and said the conservatives' political attacks on the bank could undermine its role as an independent guardian of stable prices. Poland's economy expanded more than five percent in the first half of 2006 and Balcerowicz warned that by consuming the fruits of faster growth the coalition was missing the best opportunity to put its finances in order. (Reuters)