Polish Deflation Deepens With Second Decline in August

Poland’s consumer prices fell the most on record in August, boosting expectations that an interest-rate cut flagged by the central bank for next month may be bigger than a quarter-point.

Prices dropped 0.3 percent from a year earlier after a 0.2 percent decline in July, the statistics office in Warsaw said today. That matched the median estimate in a Bloomberg survey of 34 economists. Prices slipped 0.4 percent from July.

The data bolster arguments for the central bank to reduce borrowing costs for the first time since July 2013, when policy makers halted easing after their own projections showed economic growth accelerating to 3.6 percent in 2014, more than double the rate last year. Instead, expansion slowed in the second quarter from the first three months while the central bank said recent data suggest weaker growth through the end of the year.

“The CPI figure, even as it comes in line with expectations, has to be coupled with incoming production data, and seen in the context of the geopolitical risk,” Monika Kurtek, chief economist at Bank Pocztowy SA, said by phone. “The trade war with Russia and the economic slowdown in the euro area may extend the deflation and raise the risk of deeper cuts.”

Ukrainian Conflict

The U.S. and the European Union last week tightened sanctions against Russia over the Ukrainian conflict. The crisis in Ukraine, which neighbors Poland, is the biggest threat to the euro area’s economic outlook, according to 46 percent of economists in Bloomberg’s monthly survey.

The central bank left its benchmark rate unchanged this month. After that decision, Governor Marek Belka said rate cuts “are very probable” and policy makers “won’t have to wait” until November, when the bank releases its next staff inflation projection.

The zloty traded little changed at 4.1968 per euro at 2:50 p.m. in Warsaw. The yield on Poland’s five-year zloty note fell two basis points to 2.49 percent. The 10-year securities yielded 3.21 percent, a drop of two basis points. Three-month forward rate agreements traded 53 basis points below the Warsaw Interbank Offered Rate, signaling bets on more than two quarter-point cuts by Dec. 8.

The Polish central bank’s benchmark rate is at 2.5 percent, a record low, after eight reductions for a cumulative 2.25 percentage points from November 2012 through July 2013. Only one cut in that cycle was by 50 basis points.

‘Particularly Important’

Besides inflation figures, the industrial production data due Sept. 17 will be “particularly important” for the rate-setting council before it makes its decision on the scale of the rate reduction in October, said Kurtek, who for now expects two quarter points cuts in the next two months.

Growth in industrial sales in August slowed to 0.2 percent from a year ago, compared with 2.3 percent in July, according to the median estimate of 28 economists surveyed by Bloomberg.

“Yet, there is a growing risk that production also declined, considering that car sales, which represent a vast portion of output, turned out to be so bad,” Kurtek said.

Production of passenger cars and commercial vehicles in August slumped almost 37 percent from a year earlier, IBRM Samar reported Set. 9.

The consumer-price index, which declined in July for the first time in at least 32 years, may stay negative for the rest of the year and will remain below the central bank’s 2.5 percent target through 2016, according to the monetary authority’s latest projections in July.

Deflation in August was driven by a 2.1 percent decline in the cost of food and non-alcoholic beverages and a 1 percent drop in transport prices, according to the statistics office.

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