Polish Deflation Deepens, Boosting Case for Rate Cuts

Poland’s deflation extended to a fourth month, deepening more than economists estimated as pressure builds on the central bank to resume monetary easing.

Consumer prices dropped 0.6 percent in October from a year earlier after a 0.3 percent decline in September, the statistics office in Warsaw said today. The median estimate of 29 economists surveyed by Bloomberg was for a 0.4 percent decrease. Prices were unchanged from August.

The central bank surprised economists for two consecutive months, cutting its main rate more than forecast in October and defying predictions of further easing by leaving it unchanged last week. Last month’s decision, along with evidence that the economy is beginning to emerge from a slowdown, limit the risk of inflation staying below the 2.5 percent target in the medium term, the rate-setting Monetary Policy Council said Nov. 5.

The “data are clearly supportive of further monetary easing, despite the recent MPC decision to ignore negative headline inflation readings and a very low inflation outlook,” Michal Dybula, a Warsaw-based economist at BNP Paribas SA, said by phone.

The October inflation figures and a potentially “very soft” economic-growth number to be released tomorrow will trigger a cut to 1.75 percent from 2 percent next month, he said. The consumer-price index will remain below zero “well into” the first quarter of next year, Dybula said.

The zloty extended losses to trade at 4.2282 per euro at 3 p.m. in Warsaw, 0.2 percent weaker from yesterday. The yield on the government’s two-year bond fell 11 basis points to 1.71 percent.

Globally Driven

The deepening deflation was driven by food prices, which dropped 1 percent, and a 4.1 percent decline in fuel costs. The prices of clothing and shoes fell 4.9 percent, declining the most among all measured items.

The effectiveness of potential monetary easing in combating deflation has been debated by central bankers since the consumer-price index slipped below zero in July for the first time since monthly records began in 1982. The last time Poland had negative average inflation for a full year was 1971.

Some policy makers including Jerzy Hausner and Elzbieta Chojna-Duch argued that the decline can’t be reversed by rate cuts, because it’s underpinned by global prices.

“Deflation is imported and driven by low commodity and food prices,” Chojna-Duch said in an interview Nov. 10. “Those same forces will keep inflation very low over the coming months and lowering rates wouldn’t help that significantly.”

The central bank yesterday cut its estimate for average price growth this year to 0.1 percent from 0.2 percent, and to 1.1 percent from 1.4 percent for 2015. It sees inflation accelerating in 2016 to 1.6 percent, less than its July forecast of 2.3 percent.

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