Poland's Goldilocks Economy Faces Inflation Wake-Up Call

Updated on
  • CPI exceeds expectations, reaching 2.5% central bank goal
  • Derivatives show bets on quarter-point rate rise within year

Central bank Governor Adam Glapinski likes to refer to Poland’s economy as so balanced that it’s “boring,” conjuring up a Goldilocks scenario that has allowed him to repeatedly extend a “wait-and-see” stance over whether to raise interest rates from record lows.

A surprising pick-up in inflation in November suggests, however, that the era of fast economic expansion accompanied by benign price growth is coming to an end in Poland. The consumer price index surged to the central bank’s 2.5 percent target for the first time since 2012, topping the predictions of 21 of 23 economists surveyed by Bloomberg. Meanwhile, a revision showed third-quarter economic growth at 4.9 percent from a year earlier, the fastest in almost six years. PMI, a gauge of manufacturing, hit an eight-month high.

The latest data signal that differences over when to tighten policy are set to “intensify” within Glapinski’s 10-member Monetary Policy Council, according to Bank Zachodni WBK SA analysts, led by Piotr Bielski. Still, with inflation set to slip below target in the months ahead due to base effects, an increase in the MPC’s 1.5 percent benchmark probably remains a few quarters away.

“It can’t be ruled out that a motion to hike interest rates will be submitted and voted on in the first quarter,” Bielski and his colleagues wrote on Thursday. “Still, we expect it will take time until the advocates of monetary tightening gather a majority and the first rate hike is likely in the second half of 2018.”

November Peak?

Poland’s CPI, which ended 28 months of deflation in October 2016, has steadily crept higher amid rising food and energy costs as well as cost-push inflation from a tight labor market and the fastest wage growth since 2012. Analysts have underestimated CPI four of the last five months, with the median forecast calling for 2.3 percent inflation in November.

“Given the base effects and based on our expectations about fuel and food, the November print will mark a peak in inflation for many months to come,” MBank SA economists, including Ernest Pytlarczyk, said in a note. “In the background, however, core inflation will be growing.”

Forward-rate agreements, derivatives used to bet on rate levels, are indicating 21 basis points of tightening over the next nine months and 34 over the next 12 months. The zloty weakened 0.2 percent against the euro to 4.2126 at 2:03 p.m. in Warsaw, parting its annual advance to 4.6 percent, the second-best performance globally after the Czech koruna.

While Glapinski can count on a majority on the Council to keep rates unchanged well into 2018, or even into the following year, a hawkish minority on the panel is revealing its frustration. The panel has grown nonchalant about inflation and runs the risk of hurting the economy with its “wait-and-sleep” stance, MPC member Kamil Zubelewicz told Bloomberg last month. The MPC will review borrowing costs next week, at this year’s last meeting.

Click here to read more about the standoff over Poland’s rates

Third-quarter gross domestic product grew faster than the initial reading of 4.7 percent amid a surge in exports and a continued consumption boom. Investment, the missing element of the economic recovery in past years, also registered 3.3 percent growth in the period, compared with a year earlier, the best clip since 2015.

The inflation rate will probably decline over the next few months as fast price growth from a year ago drops out of the year-on-year index, according to analysts at PKO Bank Polski SA, led by Piotr Bujak. CPI will increase to around 3 percent in mid 2018, the bank said.

“Despite growing disputes inside the MPC next year, it will not decide to hike rates sooner than in November,” PKO said in a note to clients. “That doesn’t mean that we will not see the first motions to raise rates" earlier.

— With assistance by Josh Robinson

    Quotes from this Article
    Before it's here, it's on the Bloomberg Terminal.