ADVERTISEMENT

Poland Defies Inflation Shock in Extending Record Rate Pause

Inflation Shock to Test Polish Rate Lockdown: Decision Day Guide

(Bloomberg) --

Poland extended an unprecedented period of record-low borrowing costs, looking past a jump in inflation that economists described as “shocking” and “astonishing.”

The benchmark interest rate was held at 1.5% on Wednesday, as predicted by all analysts polled by Bloomberg. Despite consumer prices unexpectedly surging to near its tolerance limit, the central bank doubled down on its stance that rates will remain unchanged for the foreseeable future.

Poland Defies Inflation Shock in Extending Record Rate Pause

“I’m calm about my prediction that interest rates will stay on hold until the end of my term” in 2022, Governor Adam Glapinski told reporters. “My view is that the first change in rates will be downward, as the economy is slowing and we’ll want to address that.”

As global economic expansion stutters and the world’s major central banks turn dovish, growth in eastern Europe remains strong. Romania, which is wary of speculative foreign capital and has its own inflation worries, also kept its benchmark unchanged on Wednesday. Serbia is likely to follow suit Thursday.

Poland’s economy -- the biggest in the European Union’s east -- is slowing a little. That will help bring inflation down to an average of 2.8% in the second half of the year, the central bank projects.

But the extent of December’s 3.4% jump caught analysts by surprise, coming in was way above the median estimate in a Bloomberg survey with no analyst predicting anything close.

Glapinski reiterated that a temporary spike in inflation had been expected, but in January rather than December. He blamed rising oil prices stemming from tensions in the Middle East for the jump, saying the path for prices hasn’t changed much.

Hawkish Minority

There are more potential inflation drivers to come. They include higher costs for energy, tobacco and alcohol -- which could combine to push price growth beyond 4% early this year.

Former central bank Governor Marek Belka said he was worried about inflation becoming entrenched between 4% and 5%.

A hawkish minority on the 10-strong Monetary Policy Council has struggled to find wider support during previous bouts of price pressure. What’s more, one of that group recently left as his term expired and is being replaced by Cezary Kochalski, who said Wednesday that he doesn’t want to be seen as a dove or a hawk.

Markets were skeptical that this week’s inflation numbers shifted the monetary-policy outlook.

Yields on 10-year government debt rose Tuesday to their highest since November as expectations for a rate cut faded. But the likelihood of a hike is also low, with the zloty remaining among the worst emerging-market performers in the aftermath of the data surprise.

“Breaking through the upper tolerance limit won’t be a signal for the majority of MPC members to increase borrowing costs,” Bank Millennium SA said in an emailed note. “We maintain our expectation that interest rates won’t change at least until the end of this year.”

--With assistance from Barbara Sladkowska, Harumi Ichikura, Irina Vilcu, Andra Timu and Gordana Filipovic.

To contact the reporters on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net;Adrian Krajewski in Warsaw at akrajewski4@bloomberg.net

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Andrew Langley, Wojciech Moskwa

©2020 Bloomberg L.P.