Polish CPI dropped 0.5% y/y in November, easing 0.2pp on the reading from the previous month, statistics office GUS announced in a flash estimate on November 30. 

While the estimate shows the deflation trend growing smaller for a consecutive month, the market had expected a quicker recovery.  Consensus had predicted CPI would come in at -0.4%. In monthly terms, CPI remained flat, GUS noted.

The flash estimate did not provide breakdown of inflation drivers, but Bank Millennium speculates food prices did most to ease the drop in prices. Analysts now predict positive inflation will only return in the first quarter of 2016, despite long-held hopes it would do so in 2015.

“We are going to see the last of deflation in December," Bank BGK now predicts. "It is much more important now to see whether growth in inflation will continue in the spring, when factors raising the dynamic of prices will stop working." The bank’s analysts are, however, confident inflation will be strengthened by “strong internal demand” and will reach 1.5% by the end of 2016.

The flash estimate is unlikely to change much in terms of monetary policy. Much will depend on the new line-up for the Monetary Policy Council (MPC), which will be affirmed in January and February. “Until that time, we do not expect any changes in monetary policy,” Bank Millennium notes. The European Central Bank's upcoming meeting this week will also be a significant influence, with rates setters likely to have more room for manoeveur should the ECB offer a hefty loosening of policy.

For now then, room for further reduction of interest rates – which were cut to a record low 1.5% in March – remains limited in Poland. In early September, the central bank Governor and head of the MPC Marek Belka all but dismissed the existence of any dangers to the economy that could provoke another cut in the foreseeable future.

The central bank has recently changed its inflation outlook for the medium term. This year’s CPI forecast was revised 0.3pp lower to -0.8% because of a deeper-than-expected decline in food prices. Inflation for 2016 was revised upwards by 0.6pp to 1.5%, while the 2017 outlook rose 0.4pp to 1.6% with estimates on food and energy prices hiked.