Polish rate hikes seem distant as inflation goes wrong way

Bloomberg

Poland’s monetary tightening, already postponed for a second year, is no longer inevitable. Instead of a widely anticipated pickup in inflation, two months of below-forecast readings are a vindication of the central bank’s reluctance to tinker with borrowing costs in what’s already its longest-ever period of stable interest rates. The 10-member Monetary Policy Council will keep its benchmark at a record-low 1.5 percent on Wednesday, according to all 34 economists surveyed by Bloomberg.
“Monetary tightening has become increasingly delayed and more conditional,” said Wiktor Wojciechowski, chief economist at Plus Bank SA. “If rates are left unchanged until mid-2019, tightening afterward, ahead of an expected economic slowdown in 2020, may not be possible.”
While much of emerging Europe is in the grip of disinflation, Poland has experienced a deceleration so sharp that price growth is now languishing below the bottom end of the central bank’s tolerance band for the first time since 2016. For Governor Adam Glapinski, who’s already ruled out a rate increase this year and said no change may be warranted “even into 2020,” the dilemma is what will come after the panel’s wait-and-see policy ends.
Given the doubts about tighter policy, Poland’s benchmark 10-year bond has kept up its rally, with the yield sliding near 3 percent, the lowest since November 2016. The zloty is little changed this year despite trading at its strongest against the euro in a month.
In March, Poland’s consumer-price growth decelerated to an annual 1.3 percent, falling below the euro area’s for the first time in a year. Staff forecasts put inflation at 2.1 percent in 2018, meaning it could fall short of the central bank’s 2.5 percent target for a sixth year.
“Incoming data have been clearly arguing against rate hikes in the next 12 months or so,” said Piotr Kalisz, chief economist at Citigroup Inc.’s Bank Handlowy SA. “We do expect that the tightening will eventually happen. The start of tightening is getting steadily delayed and it seems some time will need to pass before the moment comes.”