Poland Holds Rates as Economic Bumps Compound Record Deflation

  • Central bank's pause reaches 14th month, in line with survey
  • Disappointing economic data reinforce case for easing

Poland’s central bank left its benchmark interest rate unchanged for a 14th month even as the economy stumbles and deflation, already in its longest stretch in 60 years, deepened more than forecast.

The 10-member policy council on Friday left the seven-day reference rate at a record-low 1.5 percent, matching the predictions of all 31 economists surveyed by Bloomberg. Outgoing Governor Marek Belka, accompanied by two other central bankers, will comment on the decision at a 4 p.m. news conference in Warsaw.

Borrowing costs have remained on hold since March 2015 while a record run of deflation shows no signs of letting up and Poland’s neighbors renewed their push for monetary easing, raising expectations that it will follow. In the latest complication for the rate-setting council, which was joined by eight new policy makers this year, is evidence of distress across the economy, as sagging consumer demand and a downswing in industry reinforce the case for stimulus.

“Further monetary easing in Poland is still justified,” Jakub Borowski, chief economist at Credit Agricole SA in Warsaw, said by phone before the rate announcement. The recent weak readings in industrial output and retail will translate into a “significant” slowdown in economic growth in the first half, he said.

Currency Risks

One possible hurdle for the National Bank of Poland is the zloty, which fell the most in emerging markets on Thursday after the finance minister confirmed he asked the country’s top court to refrain from making comments about its conflict with the government that could influence a credit review by Moody’s Investors Service. The Polish currency traded 0.3 percent weaker at 4.4174 against the euro as of 12:20 p.m. in Warsaw.

Further depreciation could be among the main reasons for leaving Polish borrowing costs unchanged until the end of 2016, according to Borowski. “That probability is still high,” he said.

The bout of deflation that started in July 2014 won’t ebb until the third quarter, according to the central bank, which has missed its 2.5 percent goal for price growth for more than three years. The annual index dropped to a 12-month low of minus 1.1 percent in April.

That’s done little to slow one of the European Union’s fastest growing economies. Gross domestic product jumped 4.3 percent in the last three months of 2015 for the fastest quarterly gain in four years.

‘Abrupt Loss’

The growth spurt is now fizzling out. While the central bank already conceded economic performance in the first three months of 2016 was “slightly” weaker than late last year, a gauge tracking Poland’s manufacturing industry sounded alarm in April. Its second-biggest one-month decline since the global financial crisis in late 2008 marked “an abrupt loss of momentum” at the start of the second quarter, according to Markit Economics.

Some policy makers, including Eryk Lon, have indicated that an economic slowdown would be the main factor for revisiting the central bank’s rate pause. That moment has yet to arrive, according to 4Cast Ltd.

“We do not see this risk materializing,” Rajiev Rajkumar, an economist at 4Cast in London, said in a note. With a program of child benefits set to raise GDP growth to 3.8 percent in 2016, it’s “strengthening the NBP’s case for rate stability over the remainder of the year.”

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