Bloomberg News

Poland’s June Inflation Surprise Eases Pressure on Rates

July 14, 2011

(Updates bond prices in fifth paragraph, adds economist comment in 15th-16th.)

July 14 (Bloomberg) -- Poland’s central bank will probably extend its pause in interest-rate increases after inflation slowed more than economists estimated in June, driving two-year bond yields to their biggest one-day drop in more than a year.

Inflation slowed to 4.2 percent in the 12 months through June, from May’s 5 percent, the highest in almost a decade, the Central Statistical Office in Warsaw said yesterday. The median estimate of 29 economists surveyed by Bloomberg was 4.8 percent. Prices fell 0.4 percent in the month.

The figures underpinned the central bank’s forecast that the inflation rate will fall to its 2.5 percent target by 2013 without further interest-rate increases. The first slowdown in consumer-price growth in seven months prompted derivative traders to pare rate bets, which no longer price in another quarter percentage-point increase this year.

“The key is that there are no signs of underlying price pressures in the Polish economy,” said Neil Shearing, an emerging-markets economist at Capital Economics in London. “My feeling is that rates are going to stay on hold for a very long period of time.”

The yield on Poland’s two-year bonds tumbled 11 basis points to 4.73 percent after the inflation report, the steepest one-day decline since May 10, 2010, according to generic prices compiled by Bloomberg. It rose to 4.76 percent at 10:42 a.m. in Warsaw today.

Inflation ‘Relief’

Six-month forward-rate agreements are trading 21 basis points above the three-month Warsaw interbank offered rate, 11 basis points less than on July 12. The spread on three-month contracts narrowed to 13 basis points from 20.

The Narodowy Bank Polski said after its July 6 decision to leave rates unchanged at 4.5 percent that it wouldn’t rule out further monetary tightening if prospects for meeting its inflation target worsened.

June inflation was a “relief,” said Halina Wasilewska- Trenkner, an adviser to central bank Governor Marek Belka, yesterday on TVN CNBC. “We’re not under the kind of pressure now that would force the council to take sharp measures.”

Food prices rose 6.4 percent in June from a year earlier, down from 8.8 percent in May. The slowdown is probably due to the Russian ban on vegetable imports from the European Union and a decline in demand after the E. Coli outbreak in Germany, Piotr Bujak, an economist at Bank Zachodni WBK, said by phone.

Czech, Hungarian Prices

The neighboring Czech Republic and Hungary both reported slower-than-expected inflation on July 12. Czech consumer prices rose 1.8 percent, against estimates of 2.1 percent, and Hungary’s inflation rate declined for a second month to 3.5 percent, compared with the 3.8 percent forecast.

“We have always expected that food inflation will fall sharply in the region but this slowdown seems to have come early,” Shearing said.

The gap between yields on Poland’s five-year government bonds and inflation-linked notes, a measure of inflation expectations, narrowed to 2.92 percentage points yesterday from 3.1 percentage points July 12. Two-year interest-rate swaps, used to lock in borrowing costs, fell to 5.01 percent.

The annual inflation rate will drop close to the central bank’s target in mid-2012, Monetary Policy Council member Elzbieta Chojna-Duch told the PAP news service yesterday. It’s correct to refrain from further rate increases, she said.

ECB Monitoring Inflation

Crude-oil prices fell 7.2 percent in June, paring their 12- month gain to 26 percent. Energy costs may drop further after the German newspaper Die Welt said this week that the European Central Bank wants to expand assistance to Italy, heightening speculation Europe’s sovereign-debt crisis will curb economic growth and demand for commodities.

Another increase in rates is possible after the European Central Bank suggested this month that it may raise borrowing costs further, according to Raffaella Tenconi, an economist at Bank of America Merrill Lynch in London. The ECB raised its benchmark to 1.5 percent this week, its second increase since April.

“If the ECB carries on raising and global growth stays on track, then another hike remains on the cards in the coming months,” she said by e-mail today.

Inflation will stay at “an elevated level” in the coming months, slowing to 4 percent at the end of the year, Poland’s central bank said in a report published July 11. It forecasts the inflation rate at 2.7 percent next year and 2.4 percent in 2013 as economic growth lags behind earlier predictions.

The inflation report “was such a big surprise it even surprised policy makers,” said Simon Quijano-Evans, chief economist for emerging Europe, Middle East and Africa at ING in London. “It certainly supports the doves. But headline inflation is volatile, so they won’t rock the boat too much. They will stick with a steady message.”

--With assistance from Dorota Bartyzel and Piotr Skolimowski in Warsaw. Editors: Willy Morris, Balazs Penz, Andrew Langley

To contact the reporters on this story: Katya Andrusz at; Agnes Lovasz in London at

To contact the editor responsible for this story: Balazs Penz at

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