Poland holds rate but may cut if deflation continues

    Poland's central bank maintained its monetary policy reference rate at 2.0 percent but said it did not rule out cutting rates in the "nearest future" if the current period of deflation drags on, increasing the risk of inflation remaining below the bank's target.
    But the guidance by the National Bank of Poland (NBP), which cut its rate by 50 basis points in October, was slightly more neutral than in January because it dropped any reference to weak growth.
    Last month the NBP also said if may cut rates if the period of deflation continues but included that it may change its stance if data confirm slower economic growth.
    A comprehensive assessment of the prospects for inflation in Poland returning to the bank's target of 2.5 percent, plus/minus 1 percentage point, will be possible after an update to forecasts in March.  
    Preliminary data for 2014 show that growth in Poland's economy decreased slightly in the fourth quarter but remained above 3 percent as stable growth in consumption was accompanied by some weakening in investments.
    But industrial output, construction and assembly output, and retail sales all picked up in December while bank lending to households and businesses continues to rise. On the other hand, the sharp appreciation of the Swiss franc has boosted the debt of households with franc-denominated mortgages, limiting their consumption, the central bank said.
    Over half a million Polish families have borrowed some $35 billion in Swiss francs.
     Poland's Gross Domestic Product expanded by 0.9 percent in the third quarter from the second quarter for annual growth of 3.3 percent, down from 3.5 percent while the unemployment rate ticked up to 11.5 percent in December from 11.4 percent in November.
    Consumer prices fell by 1.0 percent in December, up from a fall of 0.6 percent in November, and the sixth month in a row of deflation.


    The National Bank of Poland issued the following statement:

"The Council has decided to keep the NBP interest rates unchanged at:
 reference rate at 2.00% on an annual basis;  lombard rate at 3.00% on an annual basis;
 deposit rate at 1.00% on an annual basis;
 rediscount rate at 2.25% on an annual basis.
Global economic activity growth remains moderate, although the situation varies across countries. In the United States GDP growth in 2014 Q4 stayed relatively robust compared to most developed economies, and the economic outlook is still positive. In turn, in the euro area, which is Poland’s main trading partner, activity growth has continued to be weak and the incoming information signal a merely slow recovery in the subsequent quarters. Similarly, in the largest emerging economies, including China, economic activity has also remained weak as for these countries, with growth in Russia decreasing close to zero.
In the past month, oil prices have fallen again, accompanied by a decline in the prices of some other commodities. Along with moderate global economic growth, this has been pulling down inflation in many countries. In Poland's immediate environment - including the euro area and most of the Central and Eastern European countries - the annual price growth has declined below zero. The fall of commodity prices may support economic growth in countries which are net commodities’ importers.
Major central banks are keeping their interest rates at a historically low levels. At the same time, the European Central Bank has expanded its asset purchase programme significantly, adding sovereign bonds to the range of instruments targeted. The Swiss National Bank, in turn, unexpectedly abolished the Swiss franc's asymmetric peg to the euro, which resulted in its sharp appreciation vis-a-vis other currencies, including the zloty. The SNB also decreased its policy interest rates.
In Poland, preliminary national accounts data for 2014 indicate that GDP growth decreased slightly in 2014 Q4, remaining above 3%. Stable growth in consumption was accompanied by some weakening in investment growth. At the same time, imports growth slowed down more than that of exports, thus reducing the negative contribution of net exports to GDP growth. In December, growth in industrial output, construction and assembly output and retail sales picked up.
Bank lending both to households and enterprises continues to rise at a steady rate. At the same time, the sharp appreciation of the Swiss franc has increased the indebtedness of households with liabilities in this currency, which may limit their consumption.

Labour market data point to a further decline of unemployment (in seasonally adjusted terms) resulting to a large extent from rising corporate employment. Yet, wage pressure in the corporate sector remains limited, as indicated by continued moderate wage growth.
In December, CPI inflation fell to -1.0% y/y, lower than expected. This was accompanied by a further decrease in most core inflation indices, which confirms the absence of demand pressure in the economy. At the same time, the decline in producer prices deepened, pointing in turn to the lack of cost pressure. Inflation expectations of enterprises and households remain very low.

Taking into account the recently heightened volatility in the financial markets, the Council has decided to leave the NBP interest rates unchanged. However, the Council does not rule out a monetary policy adjustment in the nearest future, should the expected period of deflation be extended, which would increase the risk of inflation remaining below the target in the medium term. A more comprehensive assessment of the outlook for inflation returning to the target will be possible after the Council gets acquainted with the incoming information, including the March NBP projection. "

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