Poland's Monetary Policy Council (MPC) left its benchmark interest rate at a record-low 1.5% on January 14. The meeting was the last before several members are due to be replaced by the Law and Justice (PiS) government, which is seeking a dovish stance.
As was the case with several previous meetings, the decision to hold came as no surprise. The MPC reiterated in a statement that economic growth remains stable, powered by domestic demand.
Deflation, meanwhile, is still being driven by external factors - low commodity prices in other words - that are beyond control of domestic monetary policy, it also reiterated. Prices dropped 0.5% in December, according to a flash estimate from statistics office GUS, published on January 4.
"The MPC has decided to retain interest rates on an unchanged level, as in the context of available data and forecasts the rates’ current level is supportive of keeping the Polish economy on the path of sustainable growth and allows to retain macroeconomic balance," the MPC said in a statement.
“Better evaluation of the expected inflation path and growth dynamics will be possible when the new inflation projection is released in March,” the council added.
That's a clear hint that the departing members of the MPC expect their replacements, which will arrive in in February and March, may have a different view. The term of central bank governor, and head of the MPC, Marek Belka ends in June.
Erste suggests the statement means it might not be long before the central bank returns to easing. “Our baseline scenario assumes a 50bp cut in [the first half of 2016]. We see March as the first possible timing for such a decision, as the new inflation projection will be released then,” Katarzyna Rzentarzewska writes.
The current MPC's projection is that CPI will average as low as -0.9% in 2015. Inflation is expected to accelerate in 2016, but within a range of 0.4%-1.8%. Economic growth is expected at 2.9%-3.9% in 2015. However, Belka said that the NBP's inflation projection for 2016 will drop by a significant margin, and confirmed that deflation will not end with 2015 as previously forecast, but will last well into this year.
Therefore, the suggestion is that it is the volatile currency holding back easing. “The only, but important, factor possibly holding off a decision on monetary easing is the weak zloty. The EUR/PLN went up to 4.39 today,” Erste adds.
Overall, eight of the 10 members on the council are due to be replaced in the next two months. The first three new members were officially elected by the Senate on January 13. A further two are expected to be approved on January 15 by the lower house.
However, there is no guarantee that the PiS appointees will automatically push for a renewed easing cycle. The Senate candidates, - Eugeniusz Gatnar, Jerzy Kropiwnicki, and Marek Chrzanowski - were anything but clear that they would support further cuts to the benchmark in their appearances before parliamentarians. While Chrzanowski told the Senate it is “obvious economic growth can be stimulated by monetary policy,” Gatnar noted the central bank has “many monetary policy tools" at its disposal.
Still, concensus appears to be building among analysts that the worse-than-predicted inflation picture will spur the new council into action soon. Joining Erste, BZWBK analysts write: "In our view, the downward revision of the inflation path ... and the extended period of deflation will favour monetary policy easing. We expect a rate cut by 25 bp in March, after the release of a new inflation report, and the next one probably in the second quarter."
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