Polish Inflation Slows to Seven-Year Low as Economy Stalls

Polish inflation slowed to its weakest pace in seven years as the European Union’s largest eastern economy stalls, adding scope for more interest-rate cuts.

Consumer prices rose 0.8 percent in April from a year earlier, the statistics office in Warsaw said today. That’s above the 0.7 percent median estimate of 36 economists in a Bloomberg survey and the lowest rate since June 2006. Prices rose 0.4 percent from the previous month.

Policy makers led by central bank Governor Marek Belka lowered the benchmark interest rate to a record low of 3 percent last week, citing recent data showing “that the inflation rate could stay at a very low level.” The resumption of monetary easing comes as a report yesterday showed economy expanded at its slowest pace in four years in the first quarter.

“Disinflation continues and the case for further monetary easing is still very strong,” Michal Dybula, an economist at BNP Paribas in Warsaw, said by phone. “Yesterday’s flash GDP data confirmed the economy is basically stagnating, which points to subdued wage growth and the absence of inflation pressure.”

The zloty weakened 0.4 percent to 4.1811 per euro at 2:16 p.m. in Warsaw. That extended this year’s drop to 2.3 percent, the fourth-worst performance among 25 emerging-market currencies tracked by Bloomberg. The yield on two-year notes jumped by as much as six basis points after the data and at 2:19 p.m. traded at 2.519 percent, up two basis points.

The April decline means the inflation rate has stayed below the central bank’s 1.5 percent to 3.5 percent tolerance range for a third month as recession in the euro area, Poland’s biggest trading partner, forces companies to cut prices to attract demand for their products.

Inflation Slows

The slowing price growth from 4.3 percent in June 2012 has wrong-footed policy makers who raised borrowing costs last year even as the economic slowdown was already under way. They subsequently lowered rates by 150 basis points between November and March and added another quarter point cut last week.

Still, the 10-member panel remains split about its future decisions. While there’s not much scope for further monetary easing any decision should come “sooner rather than later,” Anna Zielinska-Glebocka of the Monetary Policy Council was quoted as saying yesterday by the PAP newswire. More rate cuts would be ineffective in stimulating growth, rate setter Jan Winiecki said in an interview on TVN CNBC on the same day.

Derivatives traders are betting on at least two more quarter-point reductions by the end of the year, based on the gap between six-month forward-rate agreements and the Warsaw Interbank Offered Rate, data compiled by Bloomberg show.

BNP’s Dybula expects quarter-point rate cuts next month and in July, possibly followed by another 50 basis points later in the year, which would bring the central bank’s reference rate to 2 percent in December.

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