Jan Cienski in Warsaw -

Poland's central bank held the line on June 3, sticking with its record low benchmark rate of 2.5% despite being buffetted by contradictory pressures – on the one hand the growing likelihood of a rate cut by the European Central Bank, and on the other Poland's strong economic growth in the first quarter.

The expectation is that the Polish bank's rate will remain unchanged at least through the third quarter of this year.

Poland has seen an easing in inflationary pressure – the headline rate in April was only an annual 0.3%, below market expectations and a drop from the annual 0.7% seen in March. The bank's target inflation rate is 2.5%.

However, a rate cut is problematic because the economy is rebounding sharply after a lacklustre 2013. Growth in the first quarter came to an annual 3.4% – up from 2.7% in the final quarter of last year. The main driver of faster growth is stronger domestic demand.

William Jackson, emerging markets economist with Capital Economics, noted: “We suspect that Governor [Marek] Belka is unlikely to shift his stance markedly. After all, the economy is accelerating... Instead, we think that the MPC will wait until it has seen the National Bank’s latest GDP growth and inflation forecasts (at next month’s rate-setting meeting) before extending its pledge to leave rates unchanged.”

With inflationary pressure very low as the economy recovers, there is little immediate need to ramp up interest rates. That leaves the Polish economy in a sweet spot that could last into next year as it takes advantage of the opposite of stagflation.

Agata Urbanska of HSBC wrote: “The growth acceleration undermines concerns of protracted inflation undershooting and points to no need for further policy easing even as the latest inflation data raised the risk of deflation in the summer months.”