Polish Deflation Extends to Third Year, Amplifying Easing Calls

  • Prices extend declines on falling costs of transport, food
  • Return to monetary easing is likely this year, Mbank says

For Polish policy makers, it’s just become more difficult to explain ignoring deflation when deciding on interest rates.

According to a flash estimate, August consumer prices fell 0.8 percent from a year earlier after a 0.9 percent drop in July, the Warsaw-based statistics office said Wednesday. The median estimate of 24 economists in a Bloomberg survey was minus 0.9 percent. Prices fell 0.2 percent from July, compared with a 0.3 percent estimate in a separate survey.

Since they last cut interest rates in March 2015, policy makers at the Polish central bank have resisted calls for further easing, citing economic growth that’s held above a 3 percent annual pace. The August consumer price index, however, arrived on the heels of data revealing a collapse in investment and showing individual consumption below forecasts.

“That unfavorable GDP structure, preceded by poor July data and deflation, which is holding firm -- all of that will be driving up expectations for an interest rate cut,” Piotr Kalisz, chief economist at Citigroup Inc.’s Bank Handlowy SA in Warsaw, said by phone.

The zloty strengthened 0.1 percent to 4.3561 to the euro as of 2:58 p.m. in Warsaw.

GDP, Investment

The statistics office on Tuesday confirmed that economic growth accelerated to 3.1 percent in the second quarter from 3 percent in the previous three months, the slowest pace since October-December 2013. Investment slumped 4.9 percent in the past quarter, the second consecutive quarterly decline and the deepest since the end of 2012.

Central bankers, who will discuss interest rates Sept. 6-7, have so far stuck to the view that easing policy wouldn’t help end deflation, which is caused by falling global commodity prices and a seasonal drop in food costs. At their most recent meeting in July, policy makers also disputed the central bank staff’s latest projections for inflation and GDP, arguing that the economy would expand faster than the 3.2 percent forecast this year and the 3.5 percent estimate for 2017.

“In these circumstances we see a return to monetary easing as likely this year,” said Ernest Pytlarczyk, chief economist at mBank in Warsaw. “Even though individual MPC members either insist that monetary easing is not needed or that it is impotent, the sum of subsequent negative surprises is bound to reach critical mass soon.”

Inflation Outlook

August deflation was probably driven in part by a seasonal decrease in food prices and lower costs in transportation, clothing and footwear. The statistics office will publish the final report on Sept. 12.

Price growth dropped below zero in July 2014, starting the country’s longest stretch of deflation in six decades. Polish policy makers have missed their 2.5 percent target since December 2012. According to the central bank’s projection published in July, inflation will accelerate to 1.7 percent, or slightly above the lower end of the 1.5 percent to 3.5 percent target range policy makers set for 2018.

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