Polish borrowing costs are at an “accurate” level as the weakness of domestic and external demand will keep inflation below the central bank’s target of 2.5 percent, monetary-policy maker Jan Winiecki said.
A sluggish recovery in western Europe will have “serious consequences” for Poland, Winiecki said in a June 6 interview in Warsaw, predicting the European Union’s largest eastern economy’s growth rate will linger above 3 percent for the next three to seven years. With “strong demand hardly possible” at that pace, inflation will be 1 percent to 1.5 percent, he said.
Poland’s central bank left its benchmark interest rate unchanged at a record-low 2.5 percent last week and pledged to continue its steady-rates policy until the end of September. New projections for inflation and gross domestic product due next month may trigger a reassessment of the guidance, the rate-setting panel said June 3.
Governor Marek Belka the same day signaled that the bank may return to easing as consumer prices unexpectedly slowed in April, raising the specter of deflation. Until last month, the bank’s next move was expected to be a rate increase.
Saying a rate reduction can’t be ruled out, as happened at the central bank’s last news conference, “doesn’t determine the probability of such a move,” Winiecki said. “To make the reduction possible and likely, one would need to see a different GDP outlook than my own.”
The zloty strengthened 0.2 percent to 4.1024 per euro at 4:15 p.m. in Warsaw, adding to last week’s 1.1 percent advance, the biggest since February. Yields on two-year government notes fell two basis points to 2.48 percent.
Keeping Polish interest rates stable for longer is “most probable,” the PAP news service cited central banker Anna Zielinska-Glebocka as saying today. While a “noticeable” economic slowdown could be the signal for a reduction, the chance of a rate cut isn’t big and “I don’t quite believe this will happen,” she said.
Adam Glapinski, another rate setter, told PAP he supports keeping rates at their current level through year-end. The central bank could consider a cut at the start of the 2015 amid “weak” growth prospects and low inflation, he said.
GDP rose 3.4 percent from a year earlier last quarter as investment spending surged. The central bank forecasts 2014 growth of 3.6 percent, more than double last year’s pace. Monthly updates of the projection confirm the expansion is accelerating, Belka said.
The inflation rate, which unexpectedly dropped to a 10-month low of 0.3 percent in April, accelerated to 0.5 percent in May, according to the median estimate of 28 economists surveyed by Bloomberg, staying below the central bank’s target for the 18th month. The statistics office will publish the May inflation report on June 13.
“Inflation data may help to materialize the deflation scenario in the summer months and support the scenario of rate cuts in the last quarter,” Marcin Mrowiec, chief economist at Bank Pekao, said by e-mail today.
Even so, interpreting the data as showing a risk of deflation is a mistake, according to Winiecki. The phenomenon isn’t related to a crisis, when prices decline because producers and consumers refrain from buying until prices drop further.
“Those who threaten with deflation are making an intellectual error,” Winiecki said. “The fear of deflation now results from a lack of understanding the following sequence: slow economic growth, low demand pressure, low price increases. Simply, the world has entered a phase of slow economic growth and low inflation that will continue for years to come.”
As a result, Poland’s next rate-setting council may need to revise the inflation target because the current one is impossible to reach, regardless of monetary policy, Winiecki said.
Winiecki, who didn’t comment on the timing of possible rate adjustments, said he would prefer the benchmark “not higher” than 3 percent, when the pace of economic growth stabilizes above 3 percent.