Deflation trend likely to force National Bank of Poland to cut rates further

According to data released by Poland's Central Statistical Office, based on its new CPI basket, which allocates less weight to food and energy (41.1% vs. 41.9%), but otherwise incorporates marginal changes, Polish core CPI fell by 0.2% y/y in March (flat m/m).

Polish central bank NBP projects deflation to soon disappear and the core inflation rate to bounce back to 0.5% by end-2016 and average 1.3% in 2017. However, this topic will be debated by the MPC afresh after a new NBP governor has taken over later this quarter.

The labour market has been steadily tightening in Poland and wage growth has averaged 3%-4% y/y over the past year, and yet this has had no visible impact on the deflation trend. This might force the central bank to re-examine its forecasts which assume that continued job growth will soon raise inflation back towards target.

Eryk Lon, a new member of the Poland Monetary Policy Council, has said on Monday that should deflation persist, he might support at least one rate cut this year. "Polish central bank will probably be prepared to back further rate cuts. We forecast 50bp rate easing this year." notes Commerzbank in a report.