Poland central bank holds rates again as economy growing at 3% defies deflation

Bloomberg

Poland’s central bank kept its key interest rate unchanged at a record low for a 17th month as economic growth stabilized around 3 percent and deflation stretched into a third year.
The 10-member Monetary Policy Council on Wednesday left the seven-day reference rate at 1.5 percent, matching the predictions of all 30 economists surveyed by Bloomberg. Governor Adam Glapinski and two other central bankers will comment on the decision at a 4 p.m. news conference in Warsaw.
An outlier in the region where central banks from Frankfurt to Budapest have kept the monetary taps open to power their economies, policy makers in Poland have pivoted to focus more on financial stability after Glapinski replaced Marek Belka at the helm this summer. The National Bank of Poland has stayed on the sidelines even as record deflation persists and economic growth missed forecasts last quarter.
“Deepening declines in investment and a lack of noticeable acceleration of household spending signal lower inflationary pressure in the coming quarters,” Jakub Borowski, chief economist at Credit Agricole SA in Warsaw, said before the rate decision. Still, “that won’t push Poland to resume rate cuts, or even change its bias to easing. Policy makers give priority to financial stability and they don’t really believe in pro-growth effects of lower rates.”

Spending, Investment
Household spending barely perked up last quarter even as the government deployed its largest-ever program of family benefits, while investment shrivelled the most in almost four years. Despite record-low unemployment and gains in wages, a flash estimate of August inflation showed price declines persisted for a 25th month.
Policy makers have clung to their wait-and-see approach after last cutting their benchmark by half a point in March 2015. Since then, the central bank’s staff lowered its inflation outlook in four consecutive projections, forecasting in July that price declines will deepen again to an average of minus 0.5 percent this year.
The persistent deflation has so far prompted no policy response because the European Union’s biggest eastern economy has expanded by at least 3 percent every quarter for the past two years.

Way Out
As a way out of deflation, the central bank is counting on loose fiscal policy, combined with a booming labor market, growing wages and unemployment at the lowest since Communism collapsed a quarter century ago.
The consumer-price index is forecast by the central bank at 1.3 percent next year, meaning the gauge will remain below its target since December 2012. In July, policy makers forecast the economy will expand an average of 3.6 percent this year.
“It would be very interesting today to hear policy makers’ view on the Polish economy in the face of negative data on investments,” said Wiktor Wojciechowski, an economist at Plus Bank SA in Warsaw.
The weak activity data have prompted two central bankers, Jerzy Zyzynski and Eryk Lon, to say they would consider submitting motions for a rate cut, although none of them was convinced yet that rate cuts will give much of a boost to growth.

Rate Outlook
Six-month forward-rate agreements show a higher probability of the central bank cutting than raising borrowing costs through April, with the contracts trading 11 basis points below the Warsaw Interbank Offered Rate. The zloty traded near a two-week high at 4.3263 per euro as of 12:16 p.m. in Warsaw.
“We have sympathy with the view that the effectiveness of monetary policy — the impact of interest-rate changes on GDP — has declined,” Michal Dybula, chief economist at BNP Paribas SA in Warsaw, said in a note before the rate decision. “Reduced benefits from interest-rate changes could be linked to an already closed output gap and softer fiscal policy as well as tighter regulation of the banking sector.”