Wednesday, July 8, 2015

Poland holds rate, says market sentiment deteriorates

    Poland's central bank left its benchmark reference rate at 1.50 percent, warning that sentiment in financial markets has deteriorated with prices in some financial assets falling along with the exchange rates of Central and Eastern European currencies, including the zloty.
    But the National Bank of Poland (NBP), which cut its rate by 50 basis points in March, said stable economic growth, amidst a recovery in the euro area and a good situation in the labour market, would reduce the risk of inflation remaining below target in the medium term, a guidance that is largely similar to the one issued in recent months.
    The central bank, which targets inflation at a midpoint of 2.5 percent, within a tolerance range of 1.5 to 3.5 percent, lowered its inflation forecast for this year to minus 1.1 percent to minus 0.4 percent from the March forecast of minus 1.0 to zero percent. 
    For 2016 the NBP forecast inflation of 0.7 percent to 2.5 percent, compared with the previous forecast of minus 0.1 percent to 1.8 percent, and for 2017 it forecast inflation of 0.5 percent to 2.6 percent as compared with 0.1 to 2.2 percent.
    In May Poland's inflation rate was minus 0.9 percent, the 11th consecutive month of deflation.
    Economic growth in Poland is continuing to improve and the central bank expects second quarter growth similar to the first quarter when Gross Domestic Product expanded 1.0 percent from the previous quarter for annual growth of 3.6 percent, up from 3.3 percent in the fourth quarter.
    In its latest forecast, the central bank raised its growth forecast for 2015 to 3.0-4.3 percent from the March forecast of 2.7-4.2 percent. For 2016 growth is expected at 2.3-4.5 percent, up from 2.2-4.4 percent, and for 2017 growth is seen ranging from 2.5 to 4.7 percent, up from 2.4 to 4.6 percent.
    Poland's zloty started depreciating in July 2014, falling to 3.95 to the U.S. dollar in March. It then rebounded until mid-May before it again started falling to trade at 3.8 to the dollar today, down 7.8 percent this year.
    On June 29 the Polish prime minister said Polish banks were safe if Greece were to leave the euro zone and should the zloty weaken, the finance ministry and central bank could intervene.

    The National Bank of Poland issued the following statement:

"Growth of global economic activity remains moderate. In the euro area, economic conditions improve gradually, although activity is still low. In the United States, recent data suggest that the slowdown at the beginning of the year was temporary and the economic outlook is favourable. In turn, economic growth in China remains low as for this country, while recession continues in Poland’s eastern trading partners, i.e. Russia and Ukraine.

Despite the ongoing recovery in developed economies, the sentiment in the financial markets has recently deteriorated in the wake of growing fears of a Greek insolvency. This was conducive to a fall in prices of some financial assets as well as a weakening of exchange rates of Central and Eastern European currencies, including the zloty.

Following a sharp and long-lasting fall, oil prices have risen slightly in recent months. This has weakened disinflationary forces in many countries, fuelling an increase in price growth in the euro area. However, price growth in the global economy remains very low, and in some European economies it is still negative. In these conditions, major central banks are keeping interest rates close to zero and the ECB is continuing its asset purchase programme.

In Poland, GDP growth in 2015 Q2 most likely continued at a previous quarter level. Increase in consumption and investment, fuelled by an improving labour market situation, good financial condition of enterprises and a rise in lending, has probably remained the main driver of economic growth. At the same time, recent data do not indicate acceleration of economic growth in the coming quarters.

Due to the moderate pace of growth in demand and the continuing negative output gap, there is no inflationary pressure in the economy. Moreover, low commodity prices and moderate nominal wage growth are contributing to the continued lack of cost pressure. As a result, the annual growth of consumer prices remains negative, although the increase in the annual growth of fuel and food prices in the recent period has limited the scale of deflation. The annual growth of producer prices is also negative, while inflation expectations remain very low.

The Council became acquainted with the projection of inflation and GDP prepared by the Economic Institute, which is one of the inputs to the Council’s decisions on NBP interest rates. In line with the July projection based on the NECMOD model prepared under the assumption of unchanged NBP interest rates and taking into account data available until 22 June 2015 (projection cut-off date) there is a 50-percent probability that the annual price growth will be in the range of -1.1÷ -0.4% in 2015 (as compared to -1.0÷0.0% in the March 2015 projection), 0.7÷2.5% in 2016 (as compared to -0.1÷1.8%) and 0.5÷2.6% in 2017 (as compared to 0.1÷2.2%). At the same time, the annual GDP growth rate in line with this projection will be with a 50-percent probability in the range of 3.0÷4.3% in 2015 (as compared to 2.7÷4.2% in the March 2015 projection), 2.3÷4.5% in 2016 (as compared to 2.2÷4.4%) and 2.4.7% in 2017 (as compared to 2.4÷4.6%).

In the opinion of the Council, the annual price growth will remain negative in the coming months, mainly due to the earlier sharp fall in commodity prices. At the same time, the expected stable economic growth, amidst recovery in the euro area and good situation in the domestic labour market, reduce the risk of inflation remaining below the target in the medium term. Such an assessment is supported by NBP’s July projection. Therefore, the Council decided to keep NBP interest rates unchanged."


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