(Updates with analyst, industry comment background)
By Douglas Busvine
WARSAW, Aug 20 (Reuters) - Polish industrial output and producer prices both rose in July, signalling a start to recovery from the worst slowdown in 10 years but still leaving room for rate cuts, analysts said on Tuesday.
Factory output rose by 6.0 percent in July, year-on-year, the second gain in a row, but the unadjusted figure was boosted by an extra working day in the month. Analysts polled by Reuters had forecast a gain of 4.1 percent.
Producer price inflation ticked up to a 14-month high of 1.4 percent in July from 1.2 percent in June, Central Statistical Office figures showed.
Yields on treasury bonds eased slightly in a knee-jerk reaction to the figures, with yields on five-year at 7.59 percent and two-year notes at 7.58 percent. The zloty firmed slightly on the data.
Analysts, who had expected July PPI at 1.0 percent, said the PPI figures did not undermine the case for the Monetary Policy Council to cut rates after retail inflation hit its lowest since the collapse of communism in 1989.
"Industrial output is better than last month, but I would be cautious with the optimism -- the number of working days was higher," said Marcin Mroz, economist at SG Bank in Warsaw.
MPC member Grzegorz Wojtowicz said the output figure was positive, but it was still to early to conclude that Poland had entered recovery. Analysts forecast economic growth this year at just 1.2 percent.
The rise in producer prices reflected the bout of weakness in the zloty which followed a change of finance minister, but analysts said this would not feed through to retail inflation now below euro-zone levels.
The central bank's 8.5 percent main rate is over seven percentage points above inflation. That leaves scope for the Monetary Policy Council to ease on August 28, analysts expect.
"These two numbers work against it, but you wouldn't move interest rates on the basis of one or two numbers, so there's still the overwhelming probability of a 50 basis point cut," said Erik Nielsen, economist at Goldman Sachs in London.
CAR INDUSTRY LEADS
The strong production figures came after the release of July car sales figures showing a nine percent year-on-year rise -- the first annual increase in two years.
Restrictions on used car imports from the European Union, which have undercut sales of home-built models, have given the industry a lift but consumer confidence is rebounding too.
"The rise was partly related to the government's decision to increase excise tax on used cars from imports and to numerous promotions," said Przemyslaw Byszewski, spokesman at General Motors in Warsaw.
"But we also see general sentiment among Poles has improved. This is a good signal," he added. GM builds its Astra model at a state-of-the-art plant in Silesia, mainly for export.
Other industries remain in deep trouble, however, with the bankrupt Szczecin shipyard keeping on a skeleton staff to finish ships it has on its stocks.
The left-wing government announced temporary tariffs of 11-25 percent on 10 steel products as it tries to restructure the state-dominated steel industry before joining the European Union.