Deflation No Excuse for Poland’s Rate Hawks Buoyed by GDP

By Piotr Skolimowski and Maciej Onoszko

Photographer: Bartek Sadowski/Bloomerg

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Hope may be running out for traders betting Poland’s central bank will cut interest rates.
While consumer prices have fallen for four months, the longest run of deflation on record, data last week showed the economic recovery is holding up, with third-quarter gross domestic product expanding 3.3 percent year-on-year. The growth outlook won the day in November, when policy makers unexpectedly kept rates unchanged, central bank Governor Marek Belka said Nov. 5. The council’s next two-day meeting begins tomorrow.
“The report fits in well with the reasoning represented by the majority on the council, that the slowdown will be shallow and temporary,” Grzegorz Ogonek, an economist at ING Groep NV in Warsaw, said by e-mail on Nov. 28. “It should strengthen their resistance against rate cuts.”
Forward-rate agreements, contracts used to wager on borrowing costs, show traders betting on
no change this week, data compiled by Bloomberg show. Investors were expecting a 25 basis-point reduction heading into last month’s meeting.
Growth last quarter was driven primarily by domestic demand, including investment and private consumption, the Finance Ministry said in an e-mail on Nov. 28. That confirms the economy is in a “good” condition and set to expand 3.3 percent this year, according to the statement. The November purchasing managers index in manufacturing rose to 53.2 from 51.2 in October, HSBC and Markit Economics said today. The figure beat all estimates in a Bloomberg survey.

‘Entrenched’ Deflation

While national output continues to rise, consumer prices dropped 0.6 percent in October from a year earlier. Inflation has stayed below the policy makers’ tolerance range of 1.5 percent to 3.5 percent for 21 months and won’t reach the lower end until late next year, according to the central bank’s Nov. 5 projection.
Finance Minister Mateusz Szczurek warned last month the European Union’s largest eastern economy was at risk of “entrenched” deflation without another round of monetary easing. Since then, oil prices have tumbled and consumer inflation expectations for the next 12 months stayed at 0.2 percent in November.
“The lack of inflation is alarming,” Adam Antoniak, an economist at Bank Pekao SA, said by phone from Warsaw on Nov. 28. “There will come a time when we’ll start noticing secondary effects.” He expects the central bank will cut rates again in March.

Divided Council

Policy makers are “divided” over reductions, with some concerned further cuts could reduce the appeal of bank deposits, Belka was reported as saying by Fakt newspaper on Nov. 26. He used his tie-breaking vote to force a reduction in October and said last month there was room to ease further.
Still, motions to lower borrowing costs by 25, 50 and 100 basis points were rejected in November, minutes of the meeting showed. The governor has lost his ability to sway the panel, three people with knowledge of the rate-setting meeting told Bloomberg News last month.
The key rate will be held at 2 percent on Dec. 3, according to 32 of 36 economists surveyed by Bloomberg. Policy makers will keep borrowing costs stable at least through the first quarter of 2016, the median estimate in a separate survey shows.
Some policy makers “would reduce rates already in December, but after the GDP data the possibility of such an outcome is getting pushed forward to January,” Miroslaw Budzicki, a strategist at PKO Bank Polski SA, said by phone from Warsaw on Nov. 28. “The growth structure for the economy lowers the probability of monetary easing.”