Poland's central bank said its latest rate cut, which should help the economy recover in the second half of this year and limit the risk of inflation remaining below its target, ends its cycle of easing monetary policy.
The National Bank of Poland (NBP), which earlier today cut its benchmark reference rate for the third time in a row, said domestic economic activity remained weak in the second quarter, which will support weak wage growth, though some indicators had improved lately, including a halt in the fall of employment in the corporate sector and a slight fall in the seasonally-adjusted unemployment rate.
Although the central bank cut its forecast for economic growth and inflation, it said growth should gradually pick up from the second half of this year and this should also help boost inflation.
"The Council assesses that the significant reduction of NBP interest rates implemented since November 2012 supports economic recovery and limits the risk of inflation running below the NBP target in the medium term. The decision to lower NBP interest rates made at the current meeting ends the loosening cycle of monetary policy," the NBP said in statement.
The NBP cut its reference rate, along with other key rates, by 25 basis to 2.50 percent, bringing this year's rate reduction to 175 basis points.
Since the central bank started cutting rates in November last year - a move that was criticized as too late to cushion the economy from the euro area's recession - the NBP has cut rates by 225 points. In April the bank froze rates to assess the impact but then started cutting again in May.
Global economic activity remained low in the first half of this year, the NBP said, noting that "signals of a possible tapering of monetary expansion by the Federal Reserve have recently led to a deterioration of sentiment in financial markets."
"This, in turn, resulted in some outflow of capital from emerging markets and depreciation of their currencies, including the zloty," it added.
Like other emerging markets, Poland's zloty has weakened since early May, having depreciated some 6.0 percent since the start of the year, with a marked decline since late May. It was quoted at 4.34 to the euro today. Last month the central bank intervened in foreign exchange markets to limit volatility in zloty trading.
Last month a member of the bank's monetary council had said further rate cuts should be avoided due to the risk of weakening the zloty further and triggering capital outflows.
Poland's inflation fell further in May to 0.5 percent from 0.8 percent in April, sharply below the central bank's 2.5 percent target, due to lower energy prices.
A strong fall in producer prices and low core inflation confirms "persistently low demand and cost pressures in the economy," the NBP said, with inflation expectations by households and businesses also falling further.
The NBP's latest forecast calls for inflation in a range of 0.6 to 1.1 percent this year, lower than the March forecast of 1.3-1.9 percent, then between 0.4 and 2.0 percent in 2014, as against the previous forecast of 0.8 to 2.4 percent, and between 0.7 and 2.4 percent in 2015, steady from 0.7-2.4 percent.
Poland's Gross Domestic Product is forecast to grow between 0.5 and 1.7 percent this year, down from the March forecast of 0.6-2.0 percent, rising to 1.2-3.5 percent in 2014, compared with 1.4-3.7 percent, and within 1.6-4.2 percent in 2015, down from the March forecast of 1.9-4.4 percent.
"The July projection, however, indicates that from the second half of 2013 – together with the expected improvement of global economic activity – a gradual acceleration of GDP growth can be expected, which will be conducive to rising inflation in the coming years," the bank said.
In the first quarter of this year, Poland's economy expanded by only 0.1 percent from the fourth quarter for annual growth of 0.5 percent, the weakest rate in four years.