Sharp Polish deflation revives calls for more easing

By bne IntelliNews November 13, 2014

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Polish inflation sank well below expectations in October with a 0.6% drop in the consumer price index in annual terms, data released by national statistics office GUS on November 13 revealed. The poor figure has analysts desperately calling on the central bank to return to monetary easing.

The drop in CPI means deflation has now persisted for four months, after Poland had its first reversal - at 0.2% - in July. In both August and September CPI fell back another 0.3%. The market had expected a 0.4% drop in October.

The biggest drag came from fuel, as well as food prices, which suffered a 0.2% drop after rising 0.1% a month earlier. Failing to prevent the fall were rises in the prices of clothing and footwear and housing.

Analysts at Deutsche Bank suggest the drop in prices is "mainly due to the strong harvest in the country and Russian ban on food imports, suppressing food prices".

Consensus now expects deflation to last to the end of the year, or perhaps even a few months more. Some analysts stress that the reasons driving prices down deflation are external, and the trend should therefore have no dire impact on the economy.

However, the sharp and continued drop in inflation will reignite calls for the central bank to resume monetary easing in December, after suprising analysts by remaining on hold at 2% earlier this month. Many hope to see at least a 25bp interest rate cut.

"The reading is clearly below market expectations and strengthens our view (and market expectations) that another rate cut is needed," write analysts at Erste Bank. 

However, the National Bank of Poland signalled after its last meeting that its focus will now move onto growth rather than inflation, and several members of the monetary policy council have since made hawkish statements. The NBP updated its projections in a new inflation report on November 12, and now predicts below-target inflation to 2016. 

Yet the calls for further action from rate setters are getting more desperate, with analysts again concerned that the NBP is once again falling behind the curve. Erste expresses "hope that tomorrow’s GDP data will be convincing enough for monetary conditions to be further eased".

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