Poland's inflation surprised in February, falling more than expected, to 1.3%y/y from 1.7%y/y in January, below consensus and our forecast at 1.5%y/y, on the back of lower-than-expected food and beverages prices as well as lower communication prices. As a result, CPI fell below the lower bound of NBP’s inflation target set at 2.5% +/- 1.0pp for the first time since October 2006. The two categories responsible for the inflation surprise were also the key drivers behind the CPI decline in February: prices of food and beverages continued their downward trend, up by only 2.5%y/y vs. 3.5%y/y in January. Communication prices fell by 4.5%y/y vs. a 'mere' 1.4%y/y decline in January, driven by lower prices on the mobile telephone market. On the other hand, transportation prices interrupted their four-month long downward trend, amid higher crude oil prices on global markets, falling by 0.6%y/y after a 0.8%y/y decline in January. The annual update in weight system carried out by the Statistical Office, based on the structure of household expenditure, was neutral for the January and February CPI figures. New weights showed only slight changes: the share in CPI rose in case of transport, alcoholic beverages and tobacco products as well as food and beverages, while the share of dwelling expenses, communication as well as clothing and footwear in CPI basket fell. Lower-than-expected inflation will again fuel expectations for more interest rate cuts by the MPC. However, in our opinion, while inflation is likely to fall somewhat further in the upcoming months, at the same time economic activity indicators should show bottoming out of GDP growth in 1Q13. That said, we expect interest rates will be kept steady at the record-low level of 3.25% until end-2013, although the downside risks to our forecast increased after today's CPI print.
Poland, CPI (Feb): 1.3% y/y
Previous (Jan): 1.7% y/y
Consensus: 1.5% y/y, KBCS forecast: 1.5% y/y