Weak Polish retail sales figures strengthen chance of rate cut

By bne IntelliNews September 23, 2014

bne -


A Polish rate cut next month looks almost nailed on, with new data showing that the economy remains sluggish. Declining retail sales figures released on September 23 only gave the doves more legs, and the governor of the central bank said a cut of more than 25 basis points (bp) could come next month.

Although the retail sales data was better than expected, year-on-year growth still sank to 1.7% last month, compared with 2.1% in July. Month-on-month, Polish retail sales decreased 1.1%.  The indicator is of particular concern to Warsaw, given the significant role domestic demand plays in Poland. Consumers played a big part in the economy's rapid recovery early in the year. 

However, momentum has stalled, as the Eurozone recovery splutters and the Ukraine crisis adds to the pressure. Earlier in September, data showed Polish industrial output fell by an annual 1.9% last month. Meanwhile, deflation continues to stalk the country, with consumer prices retreating 0.3% in annual terms. 

While the temptation has been to place the blame for the Polish slowdown on reduced demand from Russia and Ukraine for exports, most analysts believe that the  Eurozone holds more responsibility. As if to illustrate the point, Eurozone PMI readings - a guide to manufacturing and services activity - released on September 23 suggested weak sentiment, with German manufacturing - a source of demand for much of Central Eastern Europe - going backwards.

Done deal

All of which leaves a rate cut at the National Bank of Poland's next Monetary Policy Council (MPC) meeting in October looking like a done deal. Hawkish Governor Marek Belka certainly gave that impression in comments to local media on September 23, saying a cut is very likely and could even exceed 25bp.

"I think that what I said at the last conference is still valid," Belka was quoted by state news agency PAP as saying, according to Reuters. "I have said that a move on interest rates is very likely. I maintain it."

Many analysts have been calling for a cut from the current record low of 2.5%, where it has sat since July 2013. However, the "Waitergate" scandal over the summer - in which Belka was accused of trading economic support for political influence within the government - is thought to have warded off an earlier move.

That may have left the MPC behind schedule. Belka also said that the rate setters will discuss whether a cut larger than the standard 25bp is now needed in order to spur growth.

Katarzyna Rzentarzewska at Erste Bank however suggests that although there is clearly discussion to be had, she expects the fact that the retail sales data were slightly better than expected to allow the hawks on the MPC to hold fast. 

“The decision on a rate cut seems to have already been made, as most MPC members agree that an adjustment in the policy rate is needed," she wrote in a note. "Most dovish members would like to see as much as a 50bp  cut at the upcoming meeting, but we see this as a less likely scenario. On the one hand, contracting industry supports the easing scenario, on the other, retail sales above expectations provide arguments for a milder move in October. We currently expect a 25bp cut at the next meeting."

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