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Poland Posts First Deflation, Rekindling Rate-Cut Calls

Aug. 13 (Bloomberg) -- Poland’s consumer-price index last month plunged below zero for the first time since the early 1980s, bolstering arguments for a rate cut in coming months.

Consumer prices fell 0.2 percent from a year earlier after a 0.3 percent gain in June, the statistics office in Warsaw said today. That matches the median estimate of 30 economists in a Bloomberg survey. Prices slipped 0.2 percent from June. It was the first recorded annual drop in the Polish price index in at least 32 years, the statistics office said.

Deflation during the third quarter had been predicted by the 10-member Monetary Policy Council, which said last month that a temporary price slump wouldn’t warrant a rate cut. Since then the risk of sustained deflation has increased as Russia first banned imports of fruit and vegetables from Poland and then extended the embargo on other food products from the European Union.

“It’s high time for the central bank to consider a rate cut,” policy maker Elzbieta Chojna-Duch said in a phone interview in Warsaw. “I will try to persuade the Council to ease rates at the September meeting.”

The zloty was little changed after the release and traded 0.3 percent stronger at 4.1898 per euro as of 3:50 p.m. in Warsaw. The yield on the government’s two-year bond fell four basis points to a record 2.3 percent.

Losing Steam

The index was dragged down by a 1.7 percent annual decline in prices of food and non-alcoholic beverages, according to the inflation report. Household costs dropped 0.6 percent from a year earlier and transport prices were down 1 percent.

“Deflation could continue in the coming months, though it won’t turn into a long-term process,” Wojciech Matysiak, an economist at Bank Pekao in Warsaw, said by e-mail. “Still, inflation will remain noticeably below 1.5 percent.”

The benchmark seven-day rate has remained at a record low of 2.5 percent for a year. Last month, policy makers dropped their pledge to keep borrowing costs steady through September after the central bank’s latest staff projections showed price growth will reach the 2.5 percent target only at the end of 2016 as the economic recovery loses steam. Inflation has trailed the bank’s price target since December 2012.

Kalisz predicts consumer-price growth will rebound above zero only at the start of 2015.

Expansion of the EU’s largest eastern economy probably slowed to 3.2 percent in the second quarter, according to the median estimate of 28 economists surveyed by Bloomberg. Gross domestic product increased 3.4 percent in the first three months, the fastest in two years.

“Pressure on central bankers will intensify if GDP growth slows below 3 percent,” Kalisz said.

The statistics office will report a flash estimate of the second-quarter GDP tomorrow at 10 a.m.

To contact the reporter on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net

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

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