Polish Inflation at 11-Month Low Bolsters Case for Rate Cut

Poland’s inflation rate dropped to the lowest in 11 months in May, bolstering the case for cutting borrowing costs to a record as price pressure remains absent.

Consumer prices increased 0.2 percent from a year earlier, matching the all-time low set in June 2013, after a 0.3 percent gain in April, the statistics office in Warsaw said today. That compares with the 0.5 percent median estimate of 29 economists in a Bloomberg survey. Prices declined 0.1 percent from April.

Central bank Governor Marek Belka returned rate cuts to the agenda on June 3 by saying the chance of monetary easing in 2014 “isn’t zero” because consumer prices may fall this summer. Inflation has stayed below the Monetary Policy Council’s 2.5 percent target for 18 months. Rate setters are wary about lowering borrowing costs further after pledging no changes through September and with the economy growing at the fastest pace in two years in the first quarter.

“This downside surprise indicates lower-than-expected inflation also in the coming months, strengthening the argument for a rate cut,” Monika Kurtek, chief economist at Bank Pocztowy in Warsaw, said by phone. “One can’t rule out that policy makers will mull over cutting the rate already in July. They may want to wait, however, watch the situation and decide to cut in September.”

The zloty strengthened 0.3 percent to 4.1268 per euro at 3:17 p.m. in Warsaw, trimming this week’s loss to 0.6 percent. The yield on the five-year government bond dropped two basis points from its level before the announcement to 3.03 percent.

Not Imminent

Inflation slowed as food prices dropped 0.8 percent in May from a year earlier, led by a 6.7 percent decline in the cost of vegetables and a 2.2 percent drop for sugar. Telecommunication prices slid 1.1 percent.

“Certainly, the moment to begin raising interest rates has moved back in time,” policy maker Andrzej Kazmierczak was cited as saying today by the PAP news service. “There’s no reason to increase them in the near future. That’s a distant prospect.”

Investors this week pared expectations for a rate cut after some policy makers signaled that monetary easing isn’t imminent. Three-month forward-rate agreements traded 16 basis points below the Warsaw Interbank Offered Rate today versus 23 basis points on June 9, according to data compiled by Bloomberg.

Easing would be warranted if the economy loses steam rather than just faces slower inflation, Andrzej Bratkowski said in a June 9 interview. Stable rates have served the economy well, according to Jerzy Hausner, another member of the bank’s 10-person Monetary Policy Council.

Not all central bankers are content to let their hands be tied by the promise to keep rates unchanged through September. A rate cut should be considered next month even if that means breaking with the forward guidance, Elzbieta Chojna-Duch said in a June 11 interview.

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

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Paul Abelsky, Andrew Langley

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