(Bloomberg) -- Living without deflation will take some getting used to. Expect few cheers from Poland's central bank.
The European Union's longest period of negative price growth after Greece ended after 28 months as the focus in Poland increasingly shifts to its dimming economic prospects. Data published on Wednesday showed zero year-on-year change in the country's consumer-price index last month, matching the median of 25 estimates in a Bloomberg survey.
Far from succumbing to a deflationary spiral that's haunted consumers and businesses in developed nations like Japan, emerging Poland rode its record stretch of price declines to growth that made it a standout in the EU. The bloc's biggest eastern economy effectively imported cheaper energy as domestic demand perked up, an experience that earned the moniker of “good deflation” from the central bank. As inflation awakens, Poland's expansion slowed to the weakest in three years last quarter.
“Deflation was good because it resulted from supply-side factors, such as energy prices, so I'm not enthusiastic about the return of inflation,” Grzegorz Zatryb, a fixed-income portfolio manager at mutual fund Skarbiec TFI SA, said by phone before the CPI data was published. “Low inflation won't harm us, but the make-or-break issue is economic growth.”
‘Dream Scenario'
Inflation has missed the central bank's goal of 2.5 percent for almost four years, falling short of the 1.5 percent lower end of its target range since February 2013. With borrowing costs on hold since March 2015, Governor Adam Glapinski said after this month's meeting of the Monetary Policy Council that his “dream scenario” is for the central bank to consider an increase late next year.
The latest projections by the central bank's staff see price declines ending this year and inflation reaching 1.3 percent in 2017 and 1.5 percent in 2018.
While deflation had no adverse effect because it boosted real incomes and individual consumption, a longer run of price declines could threaten Poland's economy, according to a joint statement sent in response to Bloomberg questions by the ministries of finance and development.
“A prolonged period of deflation could possibly eventually have a negative effect,” they said. “No symptoms of a deflation spiral appeared in Poland as deflation had no negative consequences on companies' finances and their investments decisions.”
Misfiring Economy
The $475 billion economy is misfiring as it struggles with slumping investment. The Central Statistical Office confirmed on Wednesday that the pace of expansion of gross domestic product slowed to 2.5 percent in the third quarter, the first sub-3 percent performance since 2013. Gross fixed capital formation, a measure of investment in the economy, slumped 7.7 percent from the same period a year earlier, the biggest decline since 2010.
As growth stumbles, investors have also been put off by disputes between the government and EU institutions over Poland's rule of law and the state of its democracy. The zloty is the second-worst performing currency in developing Europe this year with a 4.2 percent drop against the euro. The country's 10-year government bonds are heading for their biggest monthly loss since June 2013, with yields increasing by 53 basis points in November.
“Deflation isn't in focus any longer as right now attention shifted to the economic slowdown,” said Monika Kurtek, chief economist at Bank Pocztowy SA in Warsaw. “Deflation in Poland wasn't like the one from textbooks and, in general, it didn't do any harm.”
--With assistance from Barbara Sladkowska and Zoe Schneeweiss To contact the reporters on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net, Adrian Krajewski in Warsaw at akrajewski4@bloomberg.net. To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Wojciech Moskwa, Paul Abelsky
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