Low inflation weighs heavy on central bank
A strong złoty, combined with lower fuel and food costs, helped push annual inflation down to four percent from 4.4 in December, well below the market forecast of 4.6 percent. Month-on-month, prices rose 0.1 percent in January.
"I am pretty stunned. January's inflation came in much, much below expectations," said Olivier Desbarres, a regional analyst with CSFB in London.
Policy shift
The central bank is now expected to shift its policy bias from tightening to neutral this week. Bond prices jumped and yields fell 15-20 basis points and markets are already pricing in a first rate cut between April and July.
However, Stanisław Nieckarz, a member of the central bank's 10-strong rate-setting council, believes that the currency's strength is threatening growth. He expects inflation to fall close to the bank's 2.5 percent target by the end of 2005.
"We have to optimize our drive to lower inflation to 2.5 percent and take into account the need to foster economic growth. With this in mind, it will be hard to find an argument against 25-75 basis point rate cuts this year," Nieckarz said.
"I think inflation may fall below three percent in the third quarter and close to 2.5 percent in the fourth quarter and these forecasts assume adopting an easing bias and rate reductions," he added.
Possible pick-up
Another rate-setting council member, Halina Wasilewska-Trenkner, remains cautious. "There is a chance that the period of higher inflation is already behind us, but it is possible that the regulated price hikes will be more spread over time, which could mean that February could see a possible pick-up," she said.
Previously, the central bank raised interest rates by 125 basis points between June and August to 6.5 percent to stamp out an inflation spike sparked by EU entry in May.
However, some economists are less than enthusiastic, and say uncertainty about the złoty's performance in the run-up to elections later this year may persuade central bankers to remain cautious.
"I'm still skeptical about the possibility of a rate cut, and I still believe in the option that rates will remain unchanged this year," said Marcin Mróz, chief economist at SG Bank in Warsaw.
Forecast cuts
Finance Minister Mirosław Gronicki, speaking after the data was released, cut his inflation forecast for the first quarter to four percent from a previous 4.5 percent.
"After today's data and thanks to the strong złoty, inflation this year may be significantly better than we had earlier expected," Gronicki said. "It may be about four percent in the first quarter."
He said if the złoty, which hit 25-month peaks against the euro earlier in the month, stays strong in the first half of the year, inflation at year-end could fall below the current 2.5 percent forecast.
The złoty's current level, just below zł.4 to the euro, still posed no threat to the government's 2005 growth target of five percent, Gronicki said.
He also raised the possibility of a 'big bang' eurozone expansion, by saying that it would be advantageous if the Czech Republic, Hungary, Slovakia and Poland all joined the single currency at the same time.
Joining the club
However, he indicated that it was unlikely that Poland could join the euro by 2009.
"Eurozone entry is more probable in 2010 than 2009. 2009 is the earliest possible date," he said. Entering the euro along with Poland's smaller neighbors would "prevent the competition in attracting capital," he added.
The Czech Republic and Hungary plan to join the eurozone in 2010, while Slovakia is aiming for 2008-2009. Cyprus, Malta and the three Baltic republics, hope the join the euro before or in 2008. (Reuters)
"I am pretty stunned. January's inflation came in much, much below expectations," said Olivier Desbarres, a regional analyst with CSFB in London.
Policy shift
The central bank is now expected to shift its policy bias from tightening to neutral this week. Bond prices jumped and yields fell 15-20 basis points and markets are already pricing in a first rate cut between April and July.
However, Stanisław Nieckarz, a member of the central bank's 10-strong rate-setting council, believes that the currency's strength is threatening growth. He expects inflation to fall close to the bank's 2.5 percent target by the end of 2005.
"We have to optimize our drive to lower inflation to 2.5 percent and take into account the need to foster economic growth. With this in mind, it will be hard to find an argument against 25-75 basis point rate cuts this year," Nieckarz said.
"I think inflation may fall below three percent in the third quarter and close to 2.5 percent in the fourth quarter and these forecasts assume adopting an easing bias and rate reductions," he added.
Possible pick-up
Another rate-setting council member, Halina Wasilewska-Trenkner, remains cautious. "There is a chance that the period of higher inflation is already behind us, but it is possible that the regulated price hikes will be more spread over time, which could mean that February could see a possible pick-up," she said.
Previously, the central bank raised interest rates by 125 basis points between June and August to 6.5 percent to stamp out an inflation spike sparked by EU entry in May.
However, some economists are less than enthusiastic, and say uncertainty about the złoty's performance in the run-up to elections later this year may persuade central bankers to remain cautious.
"I'm still skeptical about the possibility of a rate cut, and I still believe in the option that rates will remain unchanged this year," said Marcin Mróz, chief economist at SG Bank in Warsaw.
Forecast cuts
Finance Minister Mirosław Gronicki, speaking after the data was released, cut his inflation forecast for the first quarter to four percent from a previous 4.5 percent.
"After today's data and thanks to the strong złoty, inflation this year may be significantly better than we had earlier expected," Gronicki said. "It may be about four percent in the first quarter."
He said if the złoty, which hit 25-month peaks against the euro earlier in the month, stays strong in the first half of the year, inflation at year-end could fall below the current 2.5 percent forecast.
The złoty's current level, just below zł.4 to the euro, still posed no threat to the government's 2005 growth target of five percent, Gronicki said.
He also raised the possibility of a 'big bang' eurozone expansion, by saying that it would be advantageous if the Czech Republic, Hungary, Slovakia and Poland all joined the single currency at the same time.
Joining the club
However, he indicated that it was unlikely that Poland could join the euro by 2009.
"Eurozone entry is more probable in 2010 than 2009. 2009 is the earliest possible date," he said. Entering the euro along with Poland's smaller neighbors would "prevent the competition in attracting capital," he added.
The Czech Republic and Hungary plan to join the eurozone in 2010, while Slovakia is aiming for 2008-2009. Cyprus, Malta and the three Baltic republics, hope the join the euro before or in 2008. (Reuters)
