Deflation Threat Sparks Polish Easing Signal

Poland’s central bank signaled the possibility of an interest-rate cut this year, with Governor Marek Belka saying the inflation rate may fall below zero in “the summer months.”

The chance of easing monetary policy in 2014 “isn’t zero,” Belka said at a news conference in Warsaw after policy makers kept the benchmark seven-day reference rate at a record-low 2.5 percent today matching the forecast of all 27 economists surveyed by Bloomberg.

Poland’s 10-member Monetary Policy Council has kept borrowing costs unchanged since July and pledged to continue their steady-rates policy until the end of September. Their commitment is being challenged by decelerating inflation as the pace of price increases unexpectedly dropped to a 10-month low of 0.3 percent in April, staying below the central bank’s 2.5 percent target for the 17th month.

“Our baseline scenario is that interest rates will remain unchanged until the end of the third quarter,” Belka said at the news conference in Warsaw. “Yet today, especially in the longer term, I wouldn’t exclude a cut.”

Even so, the central bank’s principle is to avoid “pro-cyclical adjustments” in borrowing costs and such a move is “improbable,” he said. Policy makers will review their rate guidance in July, after the central bank staff releases fresh projections for inflation and economic growth, according to today’s statement.

Zloty Weakens

The zloty weakened 0.2 percent to 4.1515 per euro at 6:30 p.m. in Warsaw. Yields on two-year government notes fell one basis points to 2.69 percent, the lowest in a year.

Derivate traders are already wagering that the next move in Polish interest rate will be a cut. Three-month forward-rate agreements were trading 10 basis points below Warsaw Interbank Offered Rate today, indicating a 40 percent probability borrowing costs will be reduced through September, according to data compiled by Bloomberg.

The threat of deflation is offsetting accelerating economic growth that would point to higher interest rates.

Gross domestic product surged 3.4 percent from a year earlier last quarter as investment spending surged, the statistical office in Warsaw said last week, revising its flash estimate of 3.3 percent. The economy will expand 3.6 percent this year, more than double the pace of 2013 and the highest since 2011, according to the central bank.

‘We’re Curious’

“We’re curious how this growth will impact the output gap and core inflation,” Anna Zielinska-Glebocka, an MPC member, said at the news conference with Belka. “If growth holds up and we won’t have to deal with persistent deflation, then a rate cut won’t be necessary”

Policy makers want to see next month’s projections from the central bank staff to decide what to do next, she said.

The central bank will probably cut its inflation forecast for this year to 0.6 percent to 0.8 percent from 1.1 percent in the May projection, according to ING Groep (INGA) NV’s Polish unit.

Poland’s subdued inflation fits into a regional trend. In Hungary, consumer prices fell an annual 0.1 percent, the first negative rate since 1968. In reaction, the central bank last week lowered the two-week deposit rate for a 22nd consecutive month and said further easing is still possible.

The Hungarian central bank cut to 2.4 percent, below Poland’s rate, may boost speculation on a similar move in Poland, according to Rafal Benecki, a Warsaw-based economist at ING. Even so, easing in Poland is “unlikely” and the chances of no rate increases in 2015 are growing, he said.

Council Rift

Comments by central bankers indicate a rift within the rate-setting panel on the need of tightening. While Andrzej Bratkowski said the first quarter would be the right moment to raise rates, Andrzej Kazmierczak said borrowing costs may remain steady until April and Adam Glapinski didn’t rule out no change through 2015.

“Judging by the comments we heard at the news conference, policy makers are debating an interest-rate cut,” Grzegorz Maliszewski, chief economist at Bank Millennium SA in Warsaw, said in an e-mailed note. “We still expect the next move on rates to be an increase. Still, low inflation may push back the timing of the first hike, which we believe could take place in the first half of next year.”

To contact the reporters on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net; Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

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

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