Nerves calmed as January inflation comes in just under target
Economy watchers breathed a sigh of relief last week when year-on-year inflation for January came in at 10.1%, lower than the expected 10.2-10.3%.
Released by the Central Statistical Office (GUS) on Tuesday, the figure was up from 9.8% year-on-year inflation for December. Its lower than expected level, however, eased some fears that the Monetary Policy Council (RPP) would hike rates to combat inflation.
A better than anticipated Consumer Price Index (CPI) for January showed a 1.8% rise in consumer prices with food prices up 1.6% and services prices up 2.7%.
James Owen, an economist with SG Bank, said that 10.1%, the first double-digit inflation figure since September 1998, was just what he expected. As food prices continue to increase throughout February and March, so likely will inflation, he said. He said food prices comprise roughly one-third of the inflation index.
Owen also said that consumer prices should level off in March or shortly thereafter, assuming oil prices do not shoot up. But "no one expects it (inflation) to go much higher," he said.
In a previous article in the WBJ, Owen had predicted inflation would end the year at just under 6.8%, at the higher end of the government's 2000 target of 5.4-6.8%. Owen said he now thinks 7.5% or slightly below that is more realistic.
"Food prices are taking longer to ease off," he said. "I'm slightly less optimistic about the actual (target) level."
Owen said the overall anticipated trend of decreasing inflation is what matters.
He also said he doesn't think the RPP will raise interest rates during its next meeting scheduled for this Wednesday. He said he thought the body would wait to take a "hard look" at the numbers in March.
But Krzysztof Bledowski, chief strategist with Wood & Co., said the council would decide to raise interest rates 150 to 200 basis points at its upcoming meeting.
Bledowski said he expected average annual inflation for 2000 to come in at 9.5% and for year-on-year inflation in December to weigh in at about 7%.
As for the most recent inflation figures, "We don't think that the situation has changed drastically as far as monetary policy is concerned," Bledowski said, referring to the tightening of monetary policy during times of inflation.
A recent "Strategy Update" by brokerage Wood & Co. forecast continued economic growth with gross domestic product (GDP) to rise to 4.8% with the zloty remaining relatively weak.
"The monetary council may consequently tolerate the inflationary impact of a weak zloty as long as high interest rates and a weak currency keep domestic demand and imports under control," the report said.
Both Bledowski and Owen said that, as far as inflation and interest rates go, the current account deficit is the more serious problem.
"I believe that if the current account continues at very high levels (it) could lead to a currency crisis in Poland," Bledowski said.
Last year's account deficit, the difference in the balance of goods and services coming in and going out of Poland, amounted to 7.6% of GDP. The account deficit takes into consideration payments for goods and services, unilateral transfers and the difference between exports and imports, among other factors.
Wood & Co.'s report said domestic demand would drive the economy's expansion this year. As domestic consumption is expected to continue to dwarf Poland's production capabilities, the resulting pressure on imports should cause a "further deterioration of the current account balance," the report said.
