RPP keeps rates steady in February

2010-02-26

The Monetary Policy Council (RPP) left interest rates unchanged at its February session, the National Bank of Poland (NBP) announced. The decision was in line with market expectations.
In its commentary on the session, the Council noted that latest data provided further evidence of reviving economic activity in the United States and (to a less extent) in the eurozone, although the job situation in developed economies remained difficult and access to credit tight; and that developing countries, especially China, were experiencing quickening economic growth. Meanwhile, initial GDP figures for the fourth quarter of 2009 as well as latest monthly macroeconomic data indicated that economic conditions were improving in Poland as well, the RPP said. Although the unemployment rate is creeping up, a stabilisation of employment in the enterprise sector seems to suggest that the negative trends on the labour market are bottoming out. Yet bank lending remains subdued, though banks expect it to increase in the months ahead.
In January the consumer price index (CPI) accelerated to 3.6% y-o-y, i.e. slightly above the top end of the central bank’s target range (2.5% y-o-y +/- 1 p.p.), driven by an acceleration in fuel prices (stemming largely from a low reference base). However, in the months ahead inflation is likely to slow, pulled down by a high reference base, weak demand, and the effects of earlier appreciation of the zloty and moderate rate of increase in labour costs.
In arriving at its decision, the Council also took note of an updated projection of inflation and GDP growth over 2010-2012 prepared by the NBP’s economists. It envisages inflation to reach 1.3-2.2% in 2010, 1.7-3.1% in 2011, and 2.6-4.6% in 2012, and GDP growth to amount to 2.1-4.1% in 2010, 1.8-4% in 2011 and 1.9-4.3% in 2012.
All things considered, the Council reckons that the likelihood of inflation being above or below the central bank’s inflationary target in the medium term is comparable. At the same time, RPP believes that a combination of the anticipated global economic recovery and positive effects of earlier interest-rate cuts should help the economy return to its potential growth path. A major source of uncertainty are the effects of (the unwinding of) the stimulus measures implemented by foreign governments to protect economic growth.
Between November 2008 and June 2009 the Council slashed interest rates by a total of 250 basis points. As a result, the main reference rate currently stands at 3.50%, an all-time low. In our view, one should not expect a change in interest rates in the months ahead. A tightening cycle could start only in the second half of the year, when the positive trends in the economy become more entrenched and inflationary pressures re-emerge. We forecast that at the end of 2010 the main reference rate will stand at 3.75%.