East Europe’s Inflation Laggard Stays Course With Rate Pause

Updated on
  • Polish central bank holds rates unchanged, in line with survey
  • Inflation is below target even after surprise December pickup

The monetary policy that served Poland well during its record stretch of price declines is proving equally handy now that reflation spreads to the European Union’s biggest eastern economy.

While lagging behind regional peers, price growth is rebounding faster than forecast in Poland after 28 months of deflation ended in November. Still, it remains below the 1.5 percent lower end of the central bank’s target range, and that’s giving policy makers the confidence to stick with their longest interest-rate pause in almost two decades. 

The 10-member Monetary Policy Council kept its benchmark at a historical low of 1.5 percent on Wednesday, in line with the predictions of all 30 analysts surveyed by Bloomberg. Speaking after the decision, Governor Adam Glapinski said the Polish economy was healthy and with the budget deficit below 3 percent of gross domestic product, there was no need for the central bank to consider any quantitative-easing measures.

“Personally, I don’t see any need to raise rates in 2017,” Glapinski told reporters in Warsaw. “We won’t want to tinker with anything.”

Glapinski Speaks on Polish Rates: News Conference

Source: NBP

The global pickup in prices, which is reverberating from China to Germany, is less of a dilemma in Poland as the economy struggles to emerge from last year’s slowdown. The central bank has clung to its policy of stable rates since easing ended in March 2015, with Glapinski already signaling that the next move in borrowing costs will be up, possibly in early 2018.

Zloty forward-rate agreements, an indication of rate expectations, signal no change over the next six to nine months. The zloty is the third-best performer this year in developing Europe with a gain of 0.8 percent against the euro.

Polish central bankers have previously shown a “low sensitivity toward inflation rising up to 1.5 percent,” said Rafal Benecki, chief economist at ING Bank Slaski SA in Warsaw. “The council will remain equally indifferent to recent growth of the consumer-price index.”

Polish inflation last month jumped to 0.8 percent from a year earlier, the fastest since 2013 and double the median estimate in a Bloomberg survey of economists. That compares with 2 percent in the neighboring Czech Republic and 1.7 percent in Germany. Inflation has missed the Polish central bank’s goal of 2.5 percent for almost four years.

“We continue to see reasons why Polish inflation is structurally lower than in the rest of the region,” Morgan Stanley economists said in a report. “Polish core prices have been softer than in the rest of central and eastern Europe, something we ascribe to higher profit buffers to absorb rises in unit labor costs, a more vibrant competitive backdrop and an increasing role for imports from China.”

Economic Headwinds

The economy’s stumble last year is also bolstering the case for the central bank’s no-change stance. The annual pace of GDP expansion slowed to 2.5 percent in the third quarter, the first sub-3 percent performance since 2013. Gross fixed capital formation, a measure of investment, slumped 7.7 percent from the same period a year earlier, the biggest decline since 2010.

GDP probably grew 2 percent in the fourth quarter and is only set to rebound to 2.7 percent in the following three months, according to analysts polled by Bloomberg.

“The thing that could change the council’s view and make it increase rates will be inflation accelerating above 2.5 percent, accompanied by another wave of turbulence on financial markets,” Michal Dybula, chief economist at BNP Paribas SA in Warsaw, said by phone on Tuesday. “Taking into account that this is not the case, and economic growth is weak, we stick to our basic scenario of no rate change this year.”

— With assistance by Andre Tartar, Barbara Sladkowska, and Wojciech Moskwa

(Updates with governor’s comments starting in third paragraph.)
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