Poland holds rates at record amid deflation

Bloomberg

Poland’s central bank left its benchmark interest rate unchanged for a 13th month as its revamped policy council defies expectations for deeper monetary easing in the face of the longest bout of deflation in 60 years.
The 10-member panel on Wednesday left the seven-day reference rate at a record-low 1.5 percent, matching the predictions of all 34 economists surveyed by Bloomberg. Outgoing Governor Marek Belka, accompanied by two other policy makers, will comment on the decision at a news conference in Warsaw.
After a changeover this year in which all but two rate setters were replaced, the National Bank of Poland is staying the course by sidestepping a renewed push for monetary stimulus among its neighbors. With borrowing costs on hold since March 2015, Poland’s annual deflation unexpectedly deepened to 0.9 percent in March and the central bank now predicts price declines will continue in the longest run since the mid-1950s. Traders continue to bet on additional easing over the next half year.
“The data hardly matter now as the new council is focused on establishing its credibility,” Ernest Pytlarczyk, chief economist at MBank SA in Warsaw, said by phone before the announcement. “Deep and persistent deflation is a fact. As soon as market conditions allow for it, the issue of rate cuts will come back into the spotlight, along with revisions to monetary-policy strategy.”
The zloty held on to its daily gains against the euro following the rates announcement, trading 0.3 percent stronger at 4.2558 at 12:24 p.m. in Warsaw. The yield on benchmark 10-year local-currency government bonds increased one basis point to 2.88 percent.

Rate Outlook
Six-month forward-rate agreements, an indication of rate expectations, traded almost 20 basis points below the Warsaw Interbank Offered Rate on Wednesday, up three basis points since the statistics office released inflation data for March. The zloty has gained 1.3 percent against the euro in the past month, the third-best performance among 24 emerging-market peers tracked by Bloomberg.
All new policy makers were appointed either by the ruling Law & Justice party, or by its ally, President Andrzej Duda. The president will also name a replacement for Belka, whose term ends in June. The party, which swept to power in 2015 with wins in presidential and parliamentary elections, vowed before the nomination process to pick central bankers who’ll favor more monetary easing to spur growth and allow Poland to reduce unemployment and boost wages.
The central bank, whose main mandate is to ensure price stability by targeting inflation, has missed its goal of 2.5 percent price growth for more than three years.

Record Deflation
The run of deflation that started in July 2014 is showing no signs of easing. The latest inflation and economic projection by the central bank’s staff sees price declines extending through the third quarter, cutting this year’s forecast to an average of minus 0.4 percent from 1.1 percent. It also showed that the index will only come near the 1.5 percent lower end of the central bank’s target range next year.
As a result of prolonged deflation and a stronger zloty, “a rate cut is still on the cards,” said Mai Doan, an analyst at Bank of America Corp. Still, its timing could be delayed to late in the second quarter or early third quarter “in view of the new members’ high caution.”

Defying Expectations
Most newcomers, all whom were present at Wednesday’s meeting for the first time, have so far spoken out against easing. Only two have indicated they’d consider lower rates, with Eryk Lon saying a slowdown among Poland’s main trading partners may be enough to trigger a decrease in rates. The euro region, led by Germany, buys more than half of Polish exports.
His fellow rate setter, Jerzy Zyzynski, allowed for the possibility of cutting rates “a little,” while cautioning that such a step wouldn’t do much to spur economic growth. Others said looser policy would be either inadvisable amid market uncertainty or unhelpful in stimulating the economy.
“Zyzynski has expressed more dovish views than the rest of the new members,” Goldman Sachs Group Inc. economists including Magdalena Polan said in a report. While expecting rates to stay on hold this year and for most of 2017, they said the risk is “skewed to the downside, with a prolonged inflation undershoot adding to the likelihood of a dovish shift on
the MPC.”