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Polish Inflation Drop to Record Low Suggests Easing’s Not Over

July 15 (Bloomberg) -- Polish inflation slowed to a record low in June, undermining Governor Marek Belka’s message that the central bank’s monetary-easing cycle ended with July’s quarter-point cut.

Consumer prices advanced 0.2 percent from a year earlier, below the 0.3 percent median estimate of 32 economists in a Bloomberg survey. It was the lowest reading since the fall of communism in 1989 and the fifth month inflation has stayed below the lower end of the central bank’s 1.5 percent-3.5 percent tolerance range. Prices were unchanged from May.

Policy makers trimmed the Narodowy Bank Polski’s benchmark seven-day rate to a record 2.5 percent on July 3 after new central bank projections showed economic growth slowing to 1.1 percent this year, the lowest in at least 17 years, and inflation slowing to 0.8 percent. After reducing borrowing costs by 225 basis points since November, rate setters are switching to “a neutral stance,” Belka told reporters on July 3.

“The inflation rate falling to an all-time low will let some investors keep betting on more monetary easing,” Warsaw-based Bank Pekao economists led by Marcin Mrowiec wrote in a research note today. “Look for more downward pressure on bond yields, especially on the short end of the curve.”

Trading in overnight index swaps today showed a 51 percent chance of a quarter-point rate cut at the central bank’s next meeting in September, compared with a 30 percent probability a week ago, data compiled by Bloomberg show.

Poland’s inflation rate now meets the European Union’s requirement for euro eligibility, the Finance Ministry reported today on its website. Businesses see further slowing of price growth in the third quarter as their forecasts of a “definite” recovery have been moved back to 2014, according to survey of 1,278 companies published today on the central bank’s website.

The zloty advanced to 4.2861 per euro at 2:03 p.m. in Warsaw, extending earlier gains to trade 0.3 percent stronger from yesterday. The yield on the two-year government bond fell two basis points after the data to 2.902 percent.

To contact the reporters on this story: Konrad Krasuski in Warsaw at kkrasuski@bloomberg.net

Marek Strzelecki in Warsaw at mstrzelecki@bloomberg.net

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

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