Poland Signals Higher Rates Next Year on Inflation, Growth Surge

  • Central bank keeps key rate at record low 1.5% for 17th month
  • Tightening vow seems suprise after recent data, Borowski says

Polish interest-rate watchers might as well get comfortable. After holding the benchmark at a record low for a 17 month, the central bank said it won’t start tightening policy until late next year if inflation and economic growth pick up as predicted.

The 10-member Monetary Policy Council left the seven-day reference rate at 1.5 percent Wednesday, matching the predictions of all 30 economists surveyed by Bloomberg. While Governor Adam Glapinski said after the decision that the bank is “moving closer to an interest-rate increase,” he said he “hopes” that will happen in the latter stages of 2017, once the economy accelerates, deflation ends and price growth starts to approach the 2.5 percent inflation target.

Outliers in a region where central banks from Frankfurt to Budapest have kept monetary taps open to power their economies, policy makers in Poland have pivoted to focus more on financial stability after Glapinski replaced Marek Belka at the regulator’s helm this summer. The National Bank of Poland has stayed on the sidelines even as record deflation persists and economic growth missed forecasts last quarter. 

“Accelerating inflation and a quite high probability that it will return near the target in a few quarters may prompt policy makers to raise rates in the second half of 2017,” said Jakub Borowski, chief economist at Credit Agricole SA in Warsaw. “Still, deepening declines in investment in the second quarter represent the main risk factor for that scenario.”

To watch Glapinski’s news conference, click here.

Household spending barely perked up last quarter, even as the government deployed its largest-ever program of family benefits, while investment dwindled the most in almost four years. Despite record-low unemployment and gains in wages, a flash estimate of August inflation showed price declines persisted for a 25th month.

Poland’s economy expanded 3.1 percent in the second quarter from a year earlier. While the figure was below the median forecast of economists in a Bloomberg survey, Glapinski said it was “good and stable” and should pick up in the first half of next year. He attributed the slower-than-predicted pace to delays in tapping EU funds, although Credit Agricole’s Borowski said the governor’s view was “highly optimistic.”

Policy makers have clung to their wait-and-see approach after last cutting their benchmark by half a point in March 2015. Since then, the central bank’s staff lowered its inflation outlook in four consecutive projections, forecasting in July that price declines will deepen again to an average of minus 0.5 percent this year.

The persistent deflation has so far prompted no policy response because the European Union’s biggest eastern economy has expanded by at least 3 percent every quarter for the past two years. Glapinski said he predicts an expansion of 3.1 percent to 3.3 percent in 2016, compared with the 3.6 percent he forecast in July.

As a way out of deflation, the central bank is counting on loose fiscal policy, combined with a booming labor market, growing wages and unemployment at the lowest since Communism collapsed a quarter century ago.

The consumer-price index is forecast by the central bank at 1.3 percent next year, meaning the gauge will remain below its target, as it has since December 2012.

The weak activity data have prompted two central bankers, Jerzy Zyzynski and Eryk Lon, to say they would consider submitting motions for a rate cut, although none of them is yet convinced that reductions will give much of a boost to growth.

Rate Outlook

Six-month forward-rate agreements show a higher probability of the central bank cutting than raising borrowing costs through April, with the contracts trading 11 basis points below the Warsaw Interbank Offered Rate. The zloty traded near a two-week high at 4.3263 per euro as of 12:16 p.m. in Warsaw.

“We have sympathy with the view that the effectiveness of monetary policy -- the impact of interest-rate changes on GDP -- has declined,” Michal Dybula, chief economist at BNP Paribas SA in Warsaw, said in a note before the rate decision. “Reduced benefits from interest-rate changes could be linked to an already closed output gap and softer fiscal policy as well as tighter regulation of the banking sector.”

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