Virus Scare Keeps Polish Rates on Pause Despite Inflation Spike

(Bloomberg) -- Poland’s central bank kept official borrowing costs on hold as the scare to supply chains and economic growth caused by the outbreak of the coronavirus trumped concerns about accelerating inflation.

The Monetary Policy Council’s decision to leave the benchmark at a record low of 1.5% on Wednesday was in line with the forecast of all 27 economists surveyed by Bloomberg. Despite the inflation rate hitting an eight-year high, a majority on the panel led by Governor Adam Glapinski is focused on preventing a sharper drop-off in economic expansion.

“The balance of risks shifted toward an even deeper slowdown” due to the ongoing coronavirus epidemic, Ernest Pytlarczyk, chief economist at MBank SA in Warsaw said before the decision was announced.

The virus outbreak is adding some justification to calls for rate cuts across the globe and triggered the U.S. Federal Reserve to lower rates on Tuesday.

As markets reeled in past days, bets on looser monetary policy in Poland and its emerging European peers Hungary and the Czech Republic surged. Forward-rate agreements price in one quarter-point cut in Poland’s benchmark within three months and another 25 basis-point reduction within six months.

The 10-member MPC, which has rejected rate-cut and rate-increase motions in past months, is struggling to contain inflation, which jumped to 4.4% in January. In response, Glapinski and several of his panelists stepped up efforts to curb price growth expectations, which are propelled higher by rising wages and energy costs.

Former Finance Minister Miroslaw Gronicki and Janusz Jankowiak, the chief economist at a Polish business lobby, wrote in an opinion piece for the Rzeczpospolita newspaper on Tuesday that verbal intervention wasn’t enough, especially given the bank’s low credibility regarding fighting excessive price growth.

Stagnation Scenario

“A stagnation scenario” where higher inflation expectations become anchored “is more likely than the idealist view that price growth will decline to target, accompanied by a modest slowdown in the economy,” they wrote.

The policy makers will review new economic projections made by the central bank’s analytical department. They’re expected to show inflation staying above target for longer, while economic growth slows to 3.5% or even less, according to Glapinski. The projections will be revealed to the public next week.

Gross domestic product growth slowed to 3.2% year-on-year in the fourth quarter and could decelerate even further in 2020 as the virus outbreak, which hasn’t been confirmed in Poland yet, disrupts supply changes and curbs consumption.

The worst-case disruption caused by the global virus outbreak could push Poland’s economy into two consecutive quarters of contraction this year and slash the 2020 annual growth rate to 1%, according to Credit Agricole SA’s unit.

“The pace of GDP growth will determine the MPC’s actions,” said Monika Kurtek, chief economist at Bank Pocztowy SA. “If it falls below 3%, then rate cuts may be on the table.”

To contact the reporters on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net;Barbara Sladkowska in Warsaw at bsladkowska@bloomberg.net

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, ;Joshua Robinson at jrobinson37@bloomberg.net, Wojciech Moskwa, Balazs Penz

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