Polish extended its slow journey towards an escape from deflation in September as the consumer price index limited its drop to 0.5% y/y, statistics office GUS announced on October 11.
The result supports the widely-held view that deflation is now genuinely weakening. August had seen deflation drop to 0.8%. The push to finally leave price falls behind will only further solidify the stance of rate setters that no cuts to the benchmark are necessary.
Prices have been falling in Poland since July 2014, but rate setters have reiterated many times in recent months that deflation is unlikely to prompt a cut in interest rates, as long as the economy is doing well. While growth in 2016 is thought unlikely to meet the government’s forecast of 3.4%, the shortfall is forecast to be just ten or twenty basis points.
In monthly terms, consumer prices did not change in September, after falling 0.2% in August. The annual fall was driven by a 4.9% drop in prices in the clothing and shoes segment. The longtime drag on the headline figure, prices in the transport sector, fell 2.5%. That, however, included a rise of 2.5% in the price of motor fuel. Falling prices of commodities worldwide are a factor beyond Polish rate setters’ control and another reason the MPC says it will hold off on further easing. Prices of food increased 0.4%.
While deflation is externally driven, the chronic fall in investment and disappointing growth seen so far this year has provoked some talk of renewed pressure for loosening policy. That scenario was however denied once agin by rate setters at their meeting earlier this month. If anything, the MPC’s next move may be a hike, although that will not come before 2018, the governor of the central bank Adam Glapinski said.
"Deflation is subsiding and CPI will return to a positive reading late in the year, likely in December," Bank Millennium forecasts. "There is no price pressure in the Polish economy, while inflation - even if it grows - will still be clearly lower than the central bank's target," the bank continues. The analysts say markets do not expect changes in interest rates and the September CPI reading does not change anything in that respect.