Bloomberg News

Polish Inflation Slowest Since 2006 Boosts Rate-Cut Case

April 15, 2013

Polish inflation slowed to its weakest pace in more than six years in March, adding to pressure on policy makers to resume cutting interest rates.

Consumer prices rose 1 percent from a year earlier, the lowest since June 2006 and less than a 1.3 percent advance in February, the Statistics Office said in Warsaw today. That’s less than the 1.1 median estimate of 34 economists in a Bloomberg survey. Prices increased 0.2 percent from the previous month.

The central bank left rates unchanged last week for the first time in five months as policy makers predicted record-low borrowing costs will revive the European Union’s largest eastern economy. Rate setters may consider further easing if inflation declines below 1 percent for “the longer term,” though such a decision won’t be “automatic,” Governor Marek Belka said after the April 10 meeting.

“You can see price growth is in a falling trend, we’re headed for 0.5 percent inflation,” Ernest Pytlarczyk, chief economist at BRE Bank in Warsaw, said by phone. “I expect at least another 50 basis points in rate cuts. What we’re seeing is stagnation, there isn’t any bounce.”

The zloty strengthened to 4.1104 per euro at 2:21 p.m. in Warsaw from 4.1183 before the release, paring its loss on the day to 0.3 percent. The yield on Poland’s benchmark 10-year bond fell to 3.514 percent, down five basis points from yesterday, according to data compiled by Bloomberg.

‘Gradual’ Recovery

The inflation rate may decline to 0.6 percent in “the summer,” Ludwik Kotecki, chief economist at the Finance Ministry, was reported as saying by Gazeta Wyborcza on April 2. The central bank targets price growth of 2.5 percent in the medium term, with a tolerance range of 1 percentage point below and above that goal.

Policy makers delivered five rate cuts since November in a bid to stave off the deepest slowdown in 12 years. While they expect a “gradual” recovery, European Central Bank President Mario Draghi said this month that risks remain on the downside for the euro area. Poland sends 52 percent of exports to 17- nation currency region.

Poland’s central bank will reduce the benchmark by another 75 basis points to 2.5 percent through the end of 2013, Bank of America Corp. said April 12, revising its previous forecast for rates to drop to 3 percent.

‘Below Target’

The cuts will come as “the euro-zone recovery fails to gain ground,” while inflation remains “below target,” Raffaella Tenconi, an economist at Bank of America in London, said in the e-mailed report.

The euro-area recession is damping demand for Polish exports while consumers curb their spending with unemployment at a six-year high. Private consumption, which accounts for 62 percent of gross domestic product, contracted in the fourth quarter for the first time since 1996.

Derivatives traders are betting that policy makers will resume monetary easing by July with a quarter-point reduction, according to the difference between three-month forward-rate agreements and the Warsaw interbank offered rate.

The euro-area economic malaise has stymied price growth across central and eastern Europe. In Hungary, the inflation rate fell to the lowest in almost 39 years in March, while in the Czech Republic it undershot the central-bank target for a third month.

“While the reading is low, it’s mainly due to food prices increasing much less than last year,” Grzegorz Maliszewski, chief economist at Bank Millennium SA in Warsaw, said by phone in Warsaw. “That’s why the influence on the central bank isn’t so obvious. Even if inflation falls below 1 percent, it’ll probably pop back up above that level in three or four months. So I don’t they’ll hurry with rate cuts.”

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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