`Joyflation' Shows Why Poland Can Stop Worrying About Price Drop

  • Poland enduring longest bout of deflation since communist era
  • Negative price growth probably deepened first time in 7 months

Poland’s central bank first called it temporary, then warned it’s a threat to the economy. Now that deflation is worsening again, policy makers may be better off ignoring it altogether.

The economy has held up well against what’s already been the longest stretch of negative price growth since the early 1980s. Data on Thursday confirmed that deflation deepened in September for the first time in seven months, with consumer prices falling 0.8 percent from a year earlier. Eight of 10 economists surveyed by Bloomberg pushed back their forecasts for the end of negative growth by one or two months from November, while two said prices may not rebound above zero until the start of 2016.

“As long as we don’t see companies withholding investments or individuals delaying purchases, this kind of deflation has no negative influence on the economy,” said Wiktor Wojciechowski, chief economist at Plus Bank SA. “The economic performance allows us to call this kind of deflation ‘good.’ Any slowdown we may see in the coming months would result from possible weakness in the German economy because of China and has nothing to do with negative prices.”

Less than two weeks before a parliamentary election, Poland is stumbling into deeper deflation as price growth below zero spreads to countries from the U.K. to Hungary after a respite. The European Union’s biggest eastern economy is reveling in “joyflation,” a term coined by Oxford Economics Ltd. to describe the combination of the oil-driven slowdown in inflation and accelerating economic growth. It’s expanded 3 percent or more for seven straight quarters, paced by gains that spanned wages and investment and the lowest unemployment rate in seven years.

‘Key Factor’

“The key factor driving Polish and global disinflation this year was the massive slump in oil prices,” said Michal Dybula, chief economist at BGZ BNP Paribas in Warsaw. “Deflation with such a strong labor market as we are seeing in Poland these days can’t be a threat. Even if deflation lasts one or two months longer, it doesn’t change the prospect for inflation returning to around 1.5 percent in mid-2016.”

The central bank has held its key interest rate at a record low for six meetings even as deflation stretched into 15 months. Policy makers, who a year ago predicted positive price growth in 2015, still maintain that a turning point is right around the corner. After leaving the benchmark unchanged at 1.5 percent last week, Governor Marek Belka rejected any need for a policy adjustment, saying consumer prices will rise above zero in December at the latest.

No Panic

“Deflation makes the economy less flexible, but in Poland’s current situation, which is characterized by growing consumption, an improving labor market and accelerating wages, deflation can’t be a reason for the Monetary Policy Council to panic,” Belka said.

That view remains at odds with market expectations of another reduction. Six-month forward-rate agreements show a higher probability of the central bank cutting than raising borrowing costs through April, trading 17 basis points below the Warsaw Interbank Offered Rate on Wednesday. They traded above the rate from May until July. The zloty traded little changed at noon in Warsaw after slipping 0.3 percent against the euro in the past two days.

‘Barely Positive’

“The likelihood of further cuts is approaching 50 percent,”said Ernest Pytlarczyk, chief economist at mBank SA, the Warsaw-based unit of Commerzbank AG. “Inflation momentum remains anchored at zero and 2016 CPI seems destined to be barely positive.” 

The National Bank of Poland has highlighted strong investment and consumer demand for extending its rate pause. Belka also said the central bank’s inflation and economic projections due in November won’t bring any major revisions.

Deflation will average 0.8 percent in 2015, before prices turn positive next year and reach the 1.5 percent lower bound of the central bank’s tolerance range, according to its latest projection published in July. Belka said last week that he sees no risk that the economy will miss growth targets of 3.6 percent this year and 3.4 percent in 2016.

That growth outlook is probably “optimistic” and Poland may take longer than expected to exit deflation, with price growth only turning positive early next year, a member of the Monetary Policy Council, Elzbieta Chojna-Duch, told reporters on Thursday. Finance Minister Mateusz Szczurek said at a news conference the same day that the consumer-price index may end the year at 0.4 percent “or more” on an annual basis.

Deflation Threat

Even so, pressures on the economy are mounting.

Manufacturers last month reported the fastest reduction in input costs since April 2014, which forced firms to cut output prices at the strongest clip in eight months as customers demanded greater discounts, according to Poland’s purchasing managers’ index. Like-for-like sales dropped 13 percent from a year earlier in September for the country’s biggest clothing retailer, LPP SA.

“Each month shows that deflation is getting extended,” said Monika Kurtek, chief economist at Bank Pocztowy SA. “At some point, such a long and deep deflation will definitely be seen in state revenue, eventually giving a negative impulse to economic growth as well.”

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