Poland Deflation Threat Cracks Belka’s Steady-Rate StancePiotr Skolimowski and Dorota Bartyzel
The threat of deflation is forcing Polish central bank Governor Marek Belka to put interest-rate cuts back on the agenda.
The chance of easing monetary policy in 2014 “isn’t zero” as the inflation rate may turn negative in “the summer months,” Belka said at a news conference in Warsaw yesterday. That signaled a shift in the position of policy makers, who left the benchmark seven-day reference rate at a record-low 2.5 percent for an 11th month.
Poland’s central bank is weighing whether to extend a pledge to keep rates unchanged beyond September. Their commitment to avoid tweaking policy is being challenged by the inflation rate unexpectedly dropping to a 10-month low of 0.3 percent in April, staying below policy makers’ 2.5 percent target for the 17th month.
“Our baseline scenario is that interest rates will remain unchanged until the end of the third quarter,” Belka said. “Yet today, especially in the longer term, I wouldn’t exclude a cut.”
Even so, the central bank’s principle is to avoid “pro-cyclical adjustments” in borrowing costs and such a move is “improbable,” he said. Policy makers will review their rate guidance in July, after the central bank releases fresh staff projections for inflation and economic growth, according to yesterday’s statement.
The opening for potential easing is showing in Polish asset prices. The zloty traded at 4.1537 at 10:33 a.m. in Warsaw, little changed after a 0.3 percent decline from yesterday. Yields on two-year government notes fell two basis points to 2.67 percent, the lowest in a year, declining for a third day.
Derivative traders are wagering that the next move in Polish interest rates will be a cut. Three-month forward-rate agreements were trading 10 basis points below Warsaw Interbank Offered Rate yesterday, indicating a 40 percent probability borrowing costs will be reduced by September, according to data compiled by Bloomberg.
The threat of deflation is offsetting accelerating economic growth that would point to higher interest rates.
Gross domestic product surged 3.4 percent from a year earlier last quarter as investment spending jumped, the statistical office in Warsaw said last week, revising its flash estimate of 3.3 percent. The economy will expand 3.6 percent this year, more than double the pace of 2013 and the highest since 2011, according to the central bank.
There are some signs the recovery is losing steam. Poland’s purchasing managers index dropped to an 11-month low in May as the business climate for manufacturers worsened because of the conflict in neighboring Ukraine and the impact on Russia, a survey by Markit Economics for HSBC Holdings Plc showed on June 2.
“We’re curious how this growth will impact the output gap and core inflation,” Anna Zielinska-Glebocka, a member of the rate panel, said at the news conference with Belka. “If growth holds up and we won’t have to deal with persistent deflation, then a rate cut won’t be necessary”
Policy makers want to see next month’s projections to decide what to do next, she said.
The central bank will probably cut its inflation forecast for this year to 0.6 percent to 0.8 percent from 1.1 percent in the May projection, according to ING Groep NV’s Polish unit.
“On its own, low inflation is probably not enough for the NBP to cut,” Pasquale Diana, a London-based economist at Morgan Stanley, wrote in a research report yesterday. “High-frequency growth indicators will take center stage again.”
Poland’s subdued inflation fits into a regional trend. In Hungary, consumer prices fell an annual 0.1 percent, the first negative rate since 1968. In reaction, the central bank last week lowered the two-week deposit rate for a 22nd consecutive month and said further easing is still possible.
The Hungarian central-bank cut to 2.4 percent, below Poland’s rate, may boost speculation of a similar move in Poland, according to Rafal Benecki, a Warsaw-based economist at ING. Even so, easing in Poland is “unlikely” and the chances of no rate increases in 2015 are growing, he said.
“To see monetary policy easing, we would need a series of disappointing data on economic activity, a lower-than-predicted inflation rate and significant zloty appreciation in the months ahead,” Maciej Reluga, chief economist at Bank Zachodni WBK in Warsaw, said in an e-mail. “Meanwhile, GDP growth is expanding and the zloty is staying in a not very wide range of fluctuation.”
Comments by central bankers indicate a rift within the rate-setting panel on the need for tightening. While Andrzej Bratkowski said the first quarter would be the right moment to raise rates, Andrzej Kazmierczak said borrowing costs may remain steady until April and Adam Glapinski didn’t rule out unchanged rates through 2015.
“Judging by the comments we heard at the news conference, policy makers are debating an interest-rate cut,” Grzegorz Maliszewski, chief economist at Bank Millennium SA in Warsaw, said in an e-mailed note. “We still expect the next move on rates to be an increase. Still, low inflation may push back the timing of the first hike, which we believe could take place in the first half of next year.”