Inflation hits long-term low, interest rates may follow

By Continuing low inflation and weak employment and wage data could push the interest ratesetting Monetary Policy Council (RPP) to drop rates at its first meeting of the year on Jan. 29-30, to economists said. December's inflation remained unchanged at 3.6% year on year, according to a government report issued last week. The 3.6% inflation rate is the lowest since the mid-1970s. Economists also said they expected the inflation rate for 2002 to hit 5-6%. The inflation report, issued by the Central Statistical Office (GUS), said that the Consumer Price Index (CPI), a broad measure of inflation in the economy, held steady the last two months of 2001 due to slower increases in food prices and the reduction of prices of some goods and services connected to transport. With December's static inflation, economists said that the RPP - the central bank's 10-member board that sets interest rates - would slice the main interest rate by 1-1.5 percentage points from the current 11.5% rate at its meeting next Tuesday and Wednesday. The RPP slashed 7.5 percentage points off interest rates with six cuts in 2001. The council has come under heavy political pressure to make deeper cuts faster but has resisted. One economist said that the rate cut would come as a result of inflation falling well below the government's target level of 6-8% for 2001. "It's still a field of maneuver to cut rates," said Janusz Jankowiak, the chief economist at BRE Bank, who forecast a 150 basis point cut as December's inflation was lower than the RPP expected. He added that for the first five months of 2002 the RPP would cut rates a total of 300 basis points and then refrain from further cuts for the rest of the year. The RPP is also likely to take into account employment and wages data issued last week that indicated inflation pressure from the labor market is low, economists said. GUS reported that employment in the corporate sector dropped 1.4% month on month after falling 0.5% in November. In November, unemployment stood at 16.8%, the highest in more than a decade. "The employment and wages report is probably more important because inflation was expected (while) the data for wages and employment was worse," said Maciej Reluga, a senior economist at ING Bank. "The employment rate may hit 20%" in 2002, he added. Economists also said they expected inflation to reach 5-6% by the end of 2002. The government has set an inflation target of 5% for this year. With expected increases in some controlled prices, a parallel increase in inflation was likely, said Dariusz Filar, the chief economist at Bank Pekao. He forecast that the yearly average would remain at 5.5% as it did in 2001, but could increase to 6% due to price increases as well as changes in the price of oil on international markets. Reluga of ING Bank said inflation would likely remain at the 3.6% level for the first half of 2002, but could increase to 4.5% this month due to a new excise tax. Inflation would then rise to 5% by year-end, affected by food and fuel prices and a strong złoty, he said. Jankowiak of BRE Bank said inflation would end at 5% at the end of 2002, but forecast lower inflation at 4% for the first half of the year due to stable food and fuel prices and a strong złoty.