Polish Inflation at 10-Month Low Shows Price Pressure Absent

Poland’s inflation rate dropped to the lowest in 10 months, confirming that price pressure is absent as policy makers consider whether to extend beyond September a pledge to keep interest rates at a record low.

Consumer prices rose 0.3 percent from a year earlier after gaining 0.7 percent in March, the lowest since June 2013, the Warsaw-based statistics office said today. That compares with the 0.7 percent median estimate of 29 economists in a Bloomberg survey. Prices were unchanged from March.

Even as the European Union’s largest eastern economy is set to more than double last year’s pace of growth to 3.6 percent, inflation will remain below the central bank’s 2.5 percent target until 2016, according to projections published by the bank in March. New forecasts in July may show even slower inflation as the recovery spurs “absolutely no demand pressure,” central banker Andrzej Kazmierczak said in a May 9 interview in which he predicted no rate changes before April.

“Everything indicates there won’t be any rate increases this year and perhaps it’s even time to think about some easing,” Piotr Nowak, the deputy head of fixed income at PKO TFI mutual fund in Warsaw, said today by phone. “The inflation data confirm there’s still growth potential for Polish bonds.”

Zloty, Bonds

The zloty weakened after the release to 4.1893 per euro at 4 p.m. in Warsaw, extending its loss on the day to 0.1 percent. The yield on the 10-year government dropped 9 basis points to 3.72 percent, its lowest since July.

Hungarian consumer prices unexpectedly fell 0.1 percent from a year earlier, the statistics office in Budapest reported yesterday. That’s the country’s first negative inflation rate since 1968.

“Poland can’t ignore deflation in Hungary,” central bank Governor Marek Belka said today at the annual meeting of the European Bank for Reconstruction and Development in Warsaw. “We have to learn to live with low inflation.”

Policy makers left the Narodowy Bank Polski’s seven-day reference rate at a record-low of 2.5 percent on May 7 and reiterated their pledge to hold borrowing costs steady for an “extended period,” at least until the end of the third quarter. Belka told reporters the forward guidance wasn’t extended until the end of 2014 due to uncertainty about the Ukrainian crisis’s potential impact on the Polish economy.

Rate Outlook

“Given the lack of inflation pressure and the potential impact of the Ukraine-Russia conflict on exports, we’re pushing back our forecast of the first Polish rate increase to July from March 2015,” Wojciech Matysiak, an economist at Bank Pekao SA in Warsaw, wrote today in an e-mailed note.

April’s slowdown in consumer-price growth was caused mainly by a 1.5 percent drop in telecommunications prices prices from the previous month and a 0.5 percent fall in the food and beverage category.

“We’re seeing a temporary drop in the inflation rate caused by food prices,” Anna Zielinska-Glebocka, a member of the central bank’s Monetary Policy Council, told reporters today in Warsaw. “It shouldn’t affect the outlook for rate increases in 2015.”

Nine-month forward rate agreement, used to lock in borrowing costs, traded four basis points below 3-month Wibor, showing for the first time since July 2013 expectations that interest rates are more likely to be cut than increase.

“It’s probable that a motion will be filed to cut interest rates at the June or July meeting of the Monetary Policy Council, though for the time being it doesn’t appear likely to attract majority support,” Pawel Radwanski, an economist at BGZ Bank in Warsaw, said today in an e-mailed note.

‘Unneeded Disruption’

Cutting rates this year would “produce unneeded disruption” on financial markets similar to the “wrong signal” given by the central bank’s May 2012 rate increase, Zielinska-Glebocka said.

The statistics office will report its preliminary estimate of first-quarter GDP growth tomorrow. The economy probably expanded by 3.3 percent in the first three months from a year earlier and growth may pick up to 4.2 percent in the last quarter, according to the central bank’s own internal monthly estimate, Kazmierczak said.

Bank economists have slightly lower expectations of first-quarter economic growth at 3.1 percent, according to the median estimate of 27 contributors to a Bloomberg survey.

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