Top EU Inflation Surge Not Enough to Shift Polish Interest Rates

(Bloomberg) -- Poland looked past the European Union’s steepest pick-up in inflation to leave interest rates at a record low.

While price growth has quickened this year more than anywhere else in the bloc and stands at a six-year high, it remains within the bank’s tolerance range. Backed by a more dovish outlook for monetary policy from the world’s major economies, Governor Adam Glapinski has repeatedly said borrowing costs are likely to remain where they are until his term ends in 2022.

The Monetary Policy Council kept the benchmark at 1.5% on Wednesday -- where it’s been for more than four years and in line with the forecasts of all analysts surveyed by Bloomberg.

“More mounting inflationary pressure in the second half of this year and at the beginning of 2020 will reduce the comfort of the more hawkishly oriented group of MPC members regarding stable rates,” said Grzegorz Maliszewski, chief economist at Bank Millenium SA in Warsaw. But “there will be no majority in the council to vote on through a possible motion to raise borrowing costs.”

Eastern Europe’s most hawkish nations have also held back from raising interest rates of late. The Czech central bank left borrowing costs unchanged last week, while Romania is expected to follow suit on Thursday.

For Poland, there are grounds to stand pat.

• Risks to economic expansion beyond its borders persist in the form of U.S.-China trade tensions and Brexit. It may be tricky to raise interest rates as the Federal Reserve and the European Central Bank move toward the opposition direction
• Even with Polish inflation accelerating toward 3% this year and 3.5% in 2020, a majority on the MPC says rates shouldn’t be raised if the economy slows. The current 5% clip is likely to ease into next year as the effect of pre-election stimulus fades

Derivatives investors don’t see an interest-rate hike on the horizon -- in fact, they’re pricing in a greater chance of a cut. The prolonged pause in borrowing costs -- alongside limited supply -- is likely to continue boosting the popularity of local-currency bonds.

The central bank on Wednesday updated its economic projections, showing that the ramp-up in inflation hasn’t translated to significantly higher forecasts for consumer prices in the coming months.

That reinforced Glapinski’s idea that interest rates won’t need to be raised any time soon. He said zloty strength caused by the ECB’s more dovish outlook is also helping to curb inflation.

“Absolutely everything is just how we’d like it to be,” Glapinski said.

--With assistance from Barbara Sladkowska.

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, Michael Winfrey

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