Polish inflation slowed to its weakest pace in more than six years 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 1.3 percent in February from a year earlier, the smallest advance since October 2006 and less than January’s 1.7 percent increase, the statistics office in Warsaw said today. That’s less than the 1.5 percent median estimate of 36 economists in a Bloomberg survey. Prices were unchanged from the previous month.
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.
“The wait-and-see period will be very short,” Michal Dybula, an economist at BNP Paribas SA in Warsaw, said by phone today. “A rate cut is very probable in May and I don’t rule one out in April because the data show that this is a very broad-based disinflation caused by falling consumption.”
The zloty extended its decline, weakening 0.3 percent to 4.1513 per euro at 3:07 p.m. in Warsaw. That brought this year’s drop to 1.6 percent, the fifth-worst performance among 25 emerging-market currencies tracked by Bloomberg. The yield on two-year notes fell six basis points to 3.27 percent.
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 sealed a 10 percent reduction in fuel prices from Russia’s OAO Gazprom, allowing it to offer cheaper energy starting Jan. 1.
“A whole series of one-time events” pushed last month’s inflation rate lower in an expected decline, Jan Winiecki, one of the central bank’s 10 rate setters, told TVN CNBC after the release.
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.
While the current rate level allows rate-setters to “adopt a short-term ‘wait-and-see’ stance,” they’ll react if inflation gets “better or worse,” another policy maker, Anna Zielinska-Glebocka, told TVN CNBC late yesterday.
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.
The euro-area recession is damping price pressure across eastern Europe. Czech inflation was the slowest in 18 months in February, while Hungarian consumer prices rose the least in almost seven months.
Polish 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.
February’s data included an annual revision in the so-called inflation basket to reflect changing consumption patterns.
“Inflation will continue to creep lower to 1.1 percent in April,” Piotr Kalisz, chief economist at Citigroup Inc.’s Polish unit, said yesterday by phone from Warsaw. “A couple of months of worse economic releases may still convince the central bank to cut again.”