Easing Creeps In as Poland’s Real Rates Set to Turn Negative

  • Inflation forecast to top benchmark rate first time since 2011
  • Surging prices to test Poland’s plan to keep benchmark on hold

Poland is finding a backdoor to monetary easing after all.

An outlier in Europe that’s kept interest rates on hold since March 2015, the National Bank of Poland hasn’t bent to a record stretch of price declines or last year’s economic slowdown, even as its counterparts from Frankfurt to Budapest loosened policy.

Now that a surge in price growth probably sent inflation above the 1.5 percent lower end of the central bank’s target range last month, its stance is becoming tantamount to easing by pushing the benchmark below the consumer price index for the first time in six years. The 10-member Monetary Policy Council left its key rate at a historical low of 1.5 percent again on Wednesday, in line with expectations of all 34 analysts surveyed by Bloomberg.

The central bank has made financial stability its overriding focus under the stewardship of Governor Adam Glapinski, sticking with a stance he’s called “conservative and cautious” and ruling out any unconventional measures. The tide of reflation sweeping Europe is putting that policy to a test, with Glapinski previously committing to tightening as the next move -- but probably not before 2018.

“If real rates turn negative, it will be for a short period of time,” Glapinski told reporters in Warsaw on Wednesday. “It’s not worth adjusting our rates” in this scenario, he said, adding that MPC is in “full agreement” over the central bank’s “wait-and-see” stance.

Zloty forward-rate agreements, an indication of rate expectations, signal no change over the next six months. The zloty, Europe’s best-performing currency this year after the Norwegian krone, was little changed at 4.3136 against the euro at 4:49 p.m. HSBC Bank Plc said the Polish currency will reverse recent gains if the country’s central bank doesn’t adopt a more hawkish rhetoric, predicting it depreciating to 4.6 per euro by the end of 2017.

On Target?

Annual inflation reached 1.7 percent in January, soaring from 0.8 percent in December which ended 28 months of below-zero growth, according to the median of 17 forecasts in a Bloomberg survey. That would put it within the target range for the first time since 2013. Gross domestic product had its first sub-3 percent gain since 2013 last year.

The central bank will review its updated staff projections at a meeting in March. Inflation, which has been below the central bank’s goal of 2.5 percent since December 2012, may return to or even exceed the aim within a year, according to Jerzy Osiatynski, a member of the rate-setting council. Glapinski said last month inflation will reach 1.5 percent this year.

“The council may change its perception of inflation slightly after the March projection because it will probably show inflation definitely reaching the target much earlier,” said Adam Antoniak, a senior economist at Bank Pekao SA. “If inflation continues to surprise with higher readings, one can’t rule our that a tightening cycle will begin in the third quarter. For now, though, this scenario is very unlikely.”

Emerging Rift

While policy makers were almost unanimous in supporting stable rates, consensus is becoming more elusive.

Although the central bank saw the uptick in prices as “mainly driven by external factors whose impact should dissipate in the medium term,” according to minutes of its January meeting, “certain council members” said that “given the expected rise in inflation and the related reduction of interest rates in real terms, it might be justified to consider interest-rate hikes in the future.”

If history is any guide, the National Bank of Poland will take its time.

“The council won’t overreact to higher inflation and allow for negative real interest rates,” Ernest Pytlarczyk, chief economist at MBank SA, said in a report. “When it comes to economic growth, the council will point out that GDP growth has already bottomed out and that the following quarters should bring its acceleration above 3 percent year-on-year.”

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