Polish consumer price inflation (CPI) expanded 2.8% year on year in February (chart) to the lowest level in three years, data from Poland’s statistical office GUS showed on March 15.

The inflation rate thus reached the National Bank of Poland’s (NBP’s) target within the 1.5%-3.5% band even though analysts expect that price growth will surge back up later this year.

Analysts say that GUS’ changes in the weighting system ascribed to price categories affected the February reading, which came in at below the consensus line of 3.2% y/y.

“The decrease in the annual inflation rate [also owed] to the high base effect in food prices. This was likely compounded by the price war between retail chains,” Santander Bank Polska said in a comment. 

Inflation is now expected to remain within the NBP’s target band in the first half of the year before rebounding after June in the wake of the government's restoring a higher VAT on food and the phase-out of the electricity price cap, the exact scope and timing of which is still subject to analysis.

Once and if the price cap ends and the government green light an update to utilities’ electricity price schemes, inflation could reach 6% at the end of the year, according to PKO BP.

An easing of price growth in the most-weighted food and non-alcoholic drinks segment drove the February reading of the main index, the breakdown of GUS data showed. 

Expanding 2.7% y/y in February, food price growth eased sharply in the second month after a gain of 4.9% y/y in January.

Price growth also eased in the second most weighted segment of housing and energy, growing 1.1% y/y in February after an increase of 1.3% y/y the preceding month.

Transport saw prices fall 4% y/y in February after a decrease of 5% y/y the preceding month, GUS data also showed. 

Prices in another major segment, culture and recreation expanded 4.4% y/y in February, easing versus a gain of 5% y/y the preceding month. 

In the alcohol and tobacco segment, prices added 6.7% in February following a gain of 8.8% y/y in January.

In month-on-month terms, the CPI expanded 0.3% in February after growing 0.4 m/m the preceding month.

The February CPI reading hints that Poland’s core inflation eased to above 5% y/y, according to Bank Millennium.

“The declines in core inflation has been much slower than in the general CPI index, which confirms the persistence of price pressures in the economy,” Bank Millennium said.

Inflation’s current easing run is probably not big enough for the NBP to consider a new rate cut soon, analysts say.

After aggressive rate cuts in September and October that left the central bank’s reference interest rate at 5.75%, the NBP appears to have adopted a wait-and-see approach.

The lower scale of inflation growth after returning to the higher VAT on food and phasing out of the electricity price cap, “amidst a strong złoty and easing monetary policy by major central banks, may prompt the MPC to make a slight interest rate cut towards the end of this year,” Bank Millennium said.

That said, “the room for interest rate cuts this year is limited, and interest rates in Poland will be lowered much more slowly than in other countries in our region,” Bank Millennium added.