Only Way Is Up for Polish Prices as Deflation Seen Near End

Updated on
  • Prices in September dropped the least in 2016, data showed
  • Central bank signaled policy tightening may begin in late 2017

Poland’s unruly deflation is finally falling into line.

After its depth and duration repeatedly defied central bank forecasts, Poland is about to turn the page on the longest stretch of price declines in six decades. Data on Friday showed a drop in the annual consumer-price index moderated to this year’s low of minus 0.5 percent in September from minus 0.8 percent in August. The median of 21 estimates in a Bloomberg survey was for minus 0.4 percent. A pickup in prices will push inflation above zero already next quarter, another poll showed.

While the central bank has gone as far as apologizing for getting deflation wrong, it’s been content to stand aside and hold interest rates since March 2015 as the economy expanded by at least 3 percent every quarter for the past two years. With the prices of oil, food and clothing set to propel the index above zero, Governor Adam Glapinski signaled this month that policy tightening won’t start until late next year if inflation and economic growth pick up as predicted.

“The tendency now will be only up, and that will see some acceleration,” said Marcin Mrowiec, chief economist at Bank Pekao SA. “We expect positive inflation to persist throughout the whole of 2017. The figure may reach 2 percent next year and launch a discussion on raising rates in the fourth quarter.”

The central bank forecasts inflation at 1.3 percent in 2017, meaning a longer wait before meeting its 2.5 percent target, which it’s missed since December 2012. Its latest projections show consumer prices dropping an average of 0.5 percent this year, with a better than 30 percent chance that the declines will extend into 2017. Price growth dropped below zero in July 2014.

Derivatives traders have scaled back their wagers on monetary easing to almost zero. Twelve-month zloty forward-rate agreements, an indication of rate expectations, dropped by almost half this month alone and traded eight basis points below the Warsaw Interbank Offered Rate on Thursday, down from their January peak of 37 basis points.

The zloty is the sixth-best performer among its emerging-market peers this quarter with a 1.4 percent gain against the euro.

“The only threat is some unexpected shock on the oil and commodity markets, which could cap inflation,” said Piotr Kalisz, chief economist at Citigroup Inc.’s Bank Handlowy SA in Warsaw. “We expect inflation at around 1.5 percent on average next year, with demand pressure and consumption pushing prices up.”

— With assistance by Barbara Sladkowska

(Updates with inflation data in second paragraph.)
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