Wednesday, September 3, 2014

Poland maintains rate but will cut if economy weakens

    Poland's central bank maintained its reference rate at 2.50 percent but said "if the incoming data confirm weakening of economic activity and an increase in risk of inflation remaining below the target in the medium term, the Council will start an adjustment of monetary policy."
    The National Bank of Poland (NBP), which cut rates by 225 basis points from November 2012 through July 2013, also said uncertainty about the outlook for economic activity had recently risen, leading to higher uncertainty about the prospects of inflation returning to the bank's target of 2.5 percent, plus/minus one percentage point.
    Poland's headline inflation rate tumbled to negative 0.2 percent in July from 0.3 percent in June and its Gross Domestic Product only expanded by 0.6 percent in the second quarter from the first quarter for annual growth of 3.3 percent, down from 3.4 percent.
    The impact of Russia's conflict with neighboring Ukraine is dampening economic activity in Poland and throughout Europe, with the risk of sustained deflation in Poland rising after Russia banned imports of fruits and vegetables from Poland.
   The central bank's change to its policy guidance clearly shows its concern over the prospects for growth and inflation. In July the BNP said policy decisions would depend on incoming information.

    "In Poland, incoming data point to a slowing momentum of economic growth," the NBP, saying the decline in second quarter growth was from a decrease in the contribution of net exports below zero and a decline in investment growth.
    However, this drag on GDP was countered by a slight acceleration in consumption growth and a significant rise in inventories.
    More recent data for July also show that annual growth in industrial production and retail sales remain low while construction and assembly output growth plunged.
    "Also, some economic activity indicators have recently declined, which may point to a further slowdown in economic activity," the NBP said.
    In addition to declining inflation in Poland, the central bank said moderate global growth is contributing to low inflation in many countries, and among the country's immediate neighbors - the euro area, Central and Eastern Europe - inflation remains close to zero.
    The NBP also noted that the while U.S. Federal Reserve has been reducing the scale of quantitative easing, "the European Central Bank intends to expand it."
    "As a result, some central banks in the countries strongly linked with the euro area have recently reduced their interest rates," a phrase that almost seems to guarantee that the Polish central bank will cut rates next time its monetary council meets in October.



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