Polish Deflation Adds Kick to Belka March Rate-Cut Signal

Polish deflation extended to a seventh month, lending weight to a signal from Governor Marek Belka that the central bank will cut its benchmark rate in March.

Consumer prices dropped 1.3 percent in January from a year earlier, deepening their 1 percent decline in December, the statistics office in Warsaw said Friday. The median estimate of 33 economists surveyed by Bloomberg was for a 1.2 percent decrease. Prices fell 0.2 percent from December.

Poland’s longest run of deflation on record may clinch the case for more monetary stimulus after another report earlier Friday showed that gross domestic product slowed more than forecast to 3 percent in the fourth quarter. A majority of the 10-member Monetary Policy Council may be ready to cut the seven-day reference interest rate at their next meeting on March 3-4, with deflation supplying one of the “sufficient arguments” for easing that may go beyond 25 basis points, Belka told reporters last week.

“While GDP growth alone may not support a rate cut in March, the deflation figure is definitely a major argument for easing,” said Monika Kurtek, chief economist at Bank Pocztowy SA. “It’s almost certain that deflation, even if more shallow, will extend also into the coming months, maybe even to September.”

The zloty depreciated 0.3 percent to 4.1852 against the euro. The yield on Poland’s two-year zloty government note dropped two basis points to 1.56 percent.

Longest Stretch

The consumer-price index was driven down mainly by a 9.7 percent slump in transport expenses and a 3.9 percent drop in the cost of food and non-alcoholic beverages. The data are subject to revision as the statistical office reviews household spending structure in March.

Poland’s inflation rate has not only missed the central bank’s 2.5 percent target by a wide margin but has also undershot the lower end of its 1.5 percent-3.5 percent tolerance range for 24 months. Price growth dropped below zero in July, starting the country’s longest stretch of deflation since the statistics office started publishing monthly price data in the 1980s.

A survey of 1,521 companies published by the central bank last month showed “no visible signs” of price pressure as deflation strengthens employers’ bargaining position on wages.

Policy makers kept their key rate on hold last week as a precaution against heightened volatility on financial markets, Belka said. The central bank last cut borrowing costs in October by half a point, twice as much as the median estimate in a Bloomberg survey.

‘Chronic Deflation’

“Poland is suffering from chronic deflation, over which the central bank has no control,” Elzbieta Chojna-Duch, a member of the Monetary Policy Council, said in an interview on Feb. 13. “The rate decision is still an open question.”

Before making that decision, policy makers will also want to see new staff forecasts for GDP and consumer-price growth due in March, she said.

While the central bank predicted in November that inflation this year would average 1.1 percent, most commercial banks in Poland have since revised down their estimates and now see price growth below zero through the first half of 2015. Finance Minister Mateusz Szczurek, who also predicts prolonged deflation, said on Jan. 29 that price growth will miss this year’s budget target of 1.2 percent.

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