September 30, 2010 / 3:04 PM / 7 years ago

UPDATE 1-Polish cbank says eyes CPI close to 2.5 pct in 2011

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* Polish aims for inflation close to 2.5 pct in 2011

* Govt's fiscal policy seen impacting rate decisions

(Adds more details, background)

By Gabriela Baczynska and Adrian Krajewski

WARSAW, Sept 30 (Reuters) - The Polish central bank's rate-setting Monetary Policy Council (MPC) wants to keep inflation close to the 2.5-percent target in 2011, according to its monetary policy assumptions published on Thursday.

But the MPC also reiterated in the document the influence of government fiscal policy on future rate moves. On Wednesday, central bank governor Marek Belka expressed concern over the "very high level" of Poland's budget deficit and urged action. [ID:nLDE68S0G8]

"Monetary policy is clearly targeted at keeping inflation closest to the 2.5 percent target rather than inside the wider range (of 1.5-3.5 percent)," the assumptions document said.

"The main monetary policy target for 2011 will still be keeping inflation at the 2.5 percent level in the medium term."

Inflation stood below target at 2.0 percent in August, the same as in July, a factor that contributed to the MPC's decision to leave interest rates flat at an a record low of 3.5 percent at its monthly sitting on Wednesday.

Most analysts believe inflation will accelerate in coming months and expect the bank to hike rates by 25 basis points as early as October.

In the assumptions document, approved on Wednesday, the bank said: "Fiscal measures are an important factor for the shape of monetary policy in 2011."

Rate Risk

The general government budget deficit is now expected to top 7 percent this year and analysts do not expect any substantial fiscal consolidation ahead of parliamentary polls next autumn.

If government revenues fall short of the 2011 draft budget forecast, public debt could breach the key 55 percent of GDP threshold, hitting investors' perceptions of Poland and spurring greater exchange rate volatility and higher long-term interest rates, the MPC said in the document.

"This could lead to worse financing conditions for both the public and private sectors," it said.

Under Polish law, breaching the 55 percent level would force the government to slash spending.

In the 2011 draft budget approved by the cabinet on Tuesday, public debt is seen peaking at 54.3 percent in 2012 and then gradually declining, but analysts say the government's growth projections may prove too optimistic.

Other factors impacting monetary policy next year include the situation in the euro zone, the domestic labour market, a planned VAT hike and the zloty currency's exchange rate, the assumptions document said. (Writing by Gareth Jones, editing by Ron Askew)

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