Lost Decade Warnings Surface on Polish Deflation Threat

By Maciej Onoszko and Piotr Bujnicki

Photographer: Piotr Malecki/Bloomberg

Shoppers walk past retail stores on Marszalkowska street in central Warsaw, Poland.... Read More

Poland needs to cut interest rates to dodge the deflation trap that has condemned Japan to two decades of economic malaise, Union Investment TFI SA said.
“If we don’t react now, there’s a risk of getting trapped in a Japan-like scenario of prolonged deflation, which we may not exit for years,” Dariusz Lasek, who helps oversee the equivalent of $2.9 billion as the head of debt investments at the Warsaw-based fund, said by phone yesterday. “The rate-setting council has a weapon, it can cut rates, but as time passes this weapon loses its power to impact inflation expectations.”
Polish consumer prices have fallen for four consecutive months, the n
ation’s first experience with deflation since the statistics office began compiling monthly data in 1982, amid sluggish growth in the euro region and a drop in crude oil and food prices. The central bank surprised investors this month by keeping interest rates unchanged, after Governor Marek Belka signaled in October that there could be a series of cuts.
Forward-rate agreements, derivatives used to wager on borrowing costs, show traders betting on at least a quarter-point reduction over the next three months, according to data compiled by Bloomberg. Market inflation expectations show consumer-price growth averaging about 1 percent over the next nine years, the figures show.
Consumer prices dropped 0.6 percent in October from a year earlier as food prices fell 1 percent and fuel costs slid 4.1 percent. Inflation has stayed below the lower end of policy makers’ tolerance range of 1.5 percent to 3.5 percent for 21 months.

Lost Decades

Price growth won’t reach the lower end of the bank’s band until late next year, according to the central bank’s latest projection on Nov. 5, when policy makers kept their key rate unchanged at a record low 2 percent.
Since Japan’s real estate and stock market bubble burst in the early 1990s, companies have focused on cutting debt and shifting manufacturing overseas. Wages stagnated and consumers reined in spending. That led to two decades with no nominal growth in the economy. Prices of goods kept falling, creating deflation that sapped optimism.
Poland is at risk of “entrenched” deflation without another round of monetary easing by the central bank as the decline in consumer prices is a “broad-based phenomenon,” not limited to food and fuel, Finance Minister Mateusz Szczurek said last week.

Rate Cuts

Three-month zloty forward-rate agreements traded 25 basis points below the Warsaw Interbank Offered Rate yesterday, indicating scope for at least a quarter-point of easing. The yield on Poland’s two-year zloty bond fell one basis point to 1.78 percent, nine basis points above an all-time low reached the day before the central bank’s last meeting.
Interest-rate cuts won’t help meet the central bank’s inflation target, policy maker Jan Winiecki told Radio TOK FM in an interview yesterday. He said he expected the inflation rate to remain “close to zero” this year and next.
Poland has the highest real interest rate, or the difference between the country’s benchmark rate and inflation, among 10 countries tracked by Bloomberg in emerging Europe, the Middle East and Africa. All euro-area members have lower real rates than Poland, data compiled Bloomberg show.
Inflation in the currency bloc was 0.4 percent in October and has remained less than half the European Central Bank’s 2 percent target for the past year, spurring interest-rate cuts as well as programs of long-term bank loans and covered-bond buying. ECB President Mario Draghi said last week that the bank must “raise inflation and inflation expectations as fast as possible” and would broaden debt purchases should the inflation outlook diminish.
“Other central banks have reacted to the risk of deflation faster,” Union Investment’s Lasek said. “Poland risks staying behind with much higher real rates.”