Polish Inflation Probably Slowed to Lowest Since 2007

Polish inflation was probably the slowest in more than five years last month as the flagging economy curbed demand, providing scope for further interest-rate cuts even after borrowing costs were trimmed to a record low.

Consumer prices rose 1.5 percent in February, matching the lowest level since August 2007, compared with a 1.7 percent advance the previous month, according to the median estimate of 36 economists in a Bloomberg survey. The statistics office will publish the data at 2 p.m. today in Warsaw.

The central bank is signaling a pause in its easing cycle after cutting the main interest rate by 50 basis points to 3.25 percent last week amid the steepest economic slowdown in 12 years. Inflation will stay near the lower end of policy makers’ 1.5 percent to 3.5 percent tolerance range through 2015, according to the bank’s March forecast.

“Weaker demand is continuing to damp price pressures,” Rafal Benecki, chief economist for Poland at ING Groep NV, said yesterday by phone from Warsaw. “The Monetary Policy Council doesn’t seem to believe the projection and the hard data may convince them to soften their language and cut rates again.”

The zloty, which has lost 1.2 percent against the euro this year, the sixth-worst performance among 25 emerging-market currencies tracked by Bloomberg, gained 0.1 percent to 4.1430 at 9:08 a.m. in Warsaw.

Rate Cuts

The central bank has delivered five interest-rate reductions since November as the euro-area recession curbed exports while rising unemployment hurt consumer spending. Private consumption, which accounts for 62 percent of gross domestic product, fell 1 percent from a year earlier in the fourth quarter, the first contraction since 1996 in the European Union’s largest eastern economy.

Inflation has also eased this year as gas monopoly Polskie Gornictwo Naftowe i Gazownictwo SA (PGN) sealed a 10 percent reduction in fuel prices from Russia’s OAO Gazprom, allowing it to offer cheaper energy starting Jan. 1.

Governor Marek Belka and fellow policy maker Elzbieta Chojna-Duch said yesterday interest-rate cuts are still possible. Further reductions “could happen if it turns out economic growth and inflation diverge from our projections,” Belka told reporters on the sidelines of a banking conference.

The current rate level allows the rate-setters to “adopt a short-term ‘wait-and-see’ stance,” although they will react if inflation gets “better or worse,” another policy maker, Anna Zielinska-Glebocka, told TVN CNBC late yesterday.

Derivative Bets

That’s consistent with expectations from derivatives traders, who’re betting on a quarter-point reduction by the end of December, based on the spread between nine-month forward-rate agreements and the Warsaw Interbank Offered Rate, data compiled by Bloomberg show.

“There seems to be a group on the council that wants to cut rates further,” Ernest Pytlarczyk, chief economist at BRE Bank SA, said yesterday by phone from Warsaw.

Inflation will continue to slow through June before picking up “slightly” in the second half, Deputy Finance Minister Janusz Cichon told reporters yesterday. Consumer-price growth will average less than 2 percent this year and further monetary easing is “necessary,” he said.

The February data will include an annual revision in the so-called inflation basket to reflect changing consumption patterns. While the statistics office will reduce the weighting of food prices, the effect on the headline figure “won’t be large,” according to Piotr Kalisz, chief economist at Citigroup Inc.’s Polish unit.

“Inflation will continue to creep lower to 1.1 percent in April,” he said yesterday by phone from Warsaw. “A couple of months of worse economic releases may still convince the central bank to cut again.”

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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