Wednesday, December 3, 2014

Poland holds rate but doesn't rule out further cuts

    Poland's central bank maintained its monetary policy reference rate at 2.0 percent, repeating its guidance from last month that October's rate cut and economic growth would limit the risk of inflation remaining below its 2.5 percent target and it would not rule out further rate cuts if new data shows a slowdown in activity.
    The National Bank of Poland (NBP), which surprised financial markets last month by holding its rate steady, noted the decline in October inflation to minus 0.6 percent - the fourth month in a row of deflation - from September's 0.3 percent drop in consumer prices, and acknowledged that it confirmed a lack of demand and cost pressures along with very low inflation expectations.
    In addition, oil prices have continued to decline and along with moderate global economic growth, this has contributed to very low inflation in many countries, including the euro area, the NBP said.
    Poland's Gross Domestic Product expanded by 0.9 percent in the third quarter from the second quarter for annual growth of 3.3 percent, down from 3.50 percent in the second quarter, while unemployment declined for the eight month in a row, dropping to 11.3 percent in October from 11.5 percent.
    The NBP said stable growth in consumption was accompanied by "some acceleration" in investment growth, but the growth in exports and imports slowed. Data for October showed weak industrial production and retails sales while construction and assembly output decreased while bank lending to businesses and households showed stable growth.

    The National Bank of Poland, which cut its rate by a larger-than-expected 50 basis points in October,  issued the following statement:

"The Council has decided to keep the NBP interest rates unchanged at:
reference rate at 2.00% on an annual basis; lombard rate at 3.00% on an annual basis;
deposit rate at 1.00% on an annual basis;
rediscount rate at 2.25% on an annual basis.

Global economic activity remains moderate, although the situation varies across countries. In the United States, economic growth in 2014 Q3 stayed relatively robust. In the euro area, in turn, GDP growth notwithstanding slight acceleration remained weak, and business climate indicators point to low activity growth probably continuing in the following quarters. This is accompanied by relatively slow GDP growth in the largest emerging economies, with a recent weakening observed in Russia and China.
In the past month, oil prices continued to decline. Along with moderate global economic growth, this contributes to very low inflation in many countries. In Poland's immediate environment including the euro area and the Central and Eastern Europe inflation remains close to zero.

Major central banks continue their expansionary monetary policy, with interest rates at historically low levels, while the ECB and the Bank of Japan run asset purchase programmes.

In Poland, in 2014 Q3 annual GDP growth decreased to 3.3% y/y (from 3.5% in 2014 Q2). Stable growth in consumption was accompanied by some acceleration in investment growth. Alongside that, exports and imports growth slowed down. As a consequence, the contribution of net exports to GDP growth stayed negative. According to data for October, industrial production and retail sales growth remained weak, while construction and assembly output decreased. This was accompanied by a stable growth in bank lending to both enterprises and households.
LFS data show an acceleration in the number of working persons in the economy in 2014 Q3, which was conducive to further reduction in the unemployment rate. At the same time, wage pressure remains limited, as indicated by continued moderate wage growth in the economy.

In October, CPI inflation declined to -0.6% y/y. This was accompanied by a decrease in core inflation indices, which confirms the absence of demand pressure in the economy. The continued decline in producer prices points, in turn, to a lack of cost pressure. This is accompanied by very low inflation expectations of enterprises and households.

In the opinion of the Council, the October adjustment of monetary policy and the stable, despite some slowdown, economic growth limit the risk of inflation remaining below the target in the medium term. Therefore, the Council decided to keep the NBP interest rates unchanged. However, the Council highlights that uncertainty regarding the economic conditions in the environment of the Polish economy persists. If the incoming data confirm a slowdown in economic activity, and weak growth in the environment of the Polish economy persists, the Council does not rule out further adjustment of monetary policy."


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