Annualised inflation continued to go down in August, to a new low of 6%. Analysts, however, believe that this level is not sufficient for the National Bank (NBR) to relax its monetary policy by cutting the interest rate.
Whereas the central bank increased the rate by one percent, and 0.25% respectively in February and June, in a bid to offset the effects of the increases in controlled prices and then anticipate the announced growth in the budgetary spending, this does not mean that deflation in August will encourage NBR to cut the interest rate during its monetary policy session on September 27.
Why not? First of all, because the NBR has been unable to temper the speed at which consumption demand is growing and, implicitly, did not steer the gross domestic product towards the non-inflationary growth potential area.
"The economy is showing signs of overheating, as a result of the delayed effects of the relaxation in monetary policy last year, shown in real negative interests from March 2005 through to April 2006, and because of the fall in taxes and the fiscal policy relaxation," says Florin Catu, chief analyst of ING Bank. In turn, Citigroup analysts believe the fast-paced growth of consumption, along with the prospects for the budgetary spending increase, remain the main risks jeopardising the inflation decline process.
"Our 2006 inflation forecast remains above the interval targeted by the NBR, that is 7%, therefore, we expect monetary policy consolidation to continue over the next few months," says Iwona Pugaciewicz-Kowalska, Citigroup Poland analyst.
She believes the NBR will raise the monetary policy rate by 0.25% in both November and December, with further increases possible in the first half of 2007, depending on the trend of the inflation curve. In Citigroup's opinion, the NBR rate could reach 9.25% at the end of 2006 and 9.5% in the first quarter of 2007.
Dragos Cabat, the vice-president of the Financial Analyst Association does not believe that the tend of declining inflation will continue until the end of the year. He sees inflation in December at 6.8%, against a reversal of the inflationary curve trend. In other words, " deflation in August will be followed by more abrupt inflation in one of the next few months," Cabat anticipates.
He says that commercial banks will probably maintain the current level of interest rates.
"At any rate, the level of banking interest rates has to reflect inflation estimated for the following year, not that (registered) in the past," Dragos Cabat added.
Radu Craciun, chief analyst with ABN Amro Bank says NBR stands high chances of achieving its inflationary target without having to resort to further rate increases, though a decline is out of the question.
"I don't think the NBR will further increase the monetary policy rate during the next session, but I also do not think that it will go down by the end of the year," Craciun stated.
The fast-paced growth of lending, significantly above the NBR forecasts made early in the year, is another reason why the central bank would not consider reducing the interest rate.
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