(Bloomberg) -- Boasting the surging growth of an emerging economy alongside inflation more akin to a developed market, Poland has for years been the envy of Europe. That “Goldilocks” combination, however, won’t be around much longer.
The shift, driven by resurgent consumer prices, marks the end of an era for the only European Union member to avoid a recession during the global financial crisis. It’s since balanced expansion of about 5% with record-low borrowing costs.
Countries like Romania are growing more quickly, but not without the inflation that brings. The Czechs have milder inflation, but its economy isn’t as perky.
“Poland has looked more and more like an anomaly even within the central and eastern European context,” said Morgan Stanley (NYSE:MS) economist Pasquale Diana. “Inflation has, at last, shown some signs of life.”
What the new model means for Poland is up for debate. Under conventional logic, faster inflation would trigger increases in interest rates that would also curb economic growth.
But central bank Governor Adam Glapinski is an established dove who’s only been encouraged by the turn in the U.S. and the eurozone away from tighter monetary policy. The fact it’s an election year also argues against a hike.
Glapinski has for a while been saying the benchmark rate should stay at 1.5% until at least 2022, when his term ends. Having barely broken 2% since 2012, some analysts now see inflation reaching 3.5% or more and staying there for a prolonged period. That’s a level Glapinski called “inconceivable” only a few months ago.
In the medium term, inflation will probably settle at about 2.5%, while economic expansion is likely to dip to 3.5%, according to Nigel Rendell, a senior analyst at Medley Global Advisors in London. Even without higher borrowing costs, budget constraints and an expected drop in EU funding will weigh on growth and make Poland a “slightly less attractive” investment destination, he said.
‘Soft Landing’
“Poland is probably trending back to something more sustainable -- this looks to be a ‘soft landing,”’ Rendell said by email. “If the central bank continues to refuse to contemplate any rate rise for the foreseeable future, then the zloty will lose some its regional shine.”
So far, the central bank is unperturbed. At his last news conference, Glapinski dismissed the threat of above-target inflation, saying it will moderate after a pickup to 3% this year.
But factors that have worked in his favor may not do so much longer. While hundreds of thousands of workers fleeing the war in Ukraine have kept a lid on wage pressures, many could soon be heading to Germany. A freeze in energy prices may soon be lifted.
Alongside those risks, unemployment remains at a record low and the government is boosting is re-election chances with $11 billion of stimulus that’s set to juice consumer spending.
“For years, we almost forgot that inflation may speed up in any noticeable way,” said Monika Kurtek, chief economist at Bank Pocztowy SA in Warsaw. “Now we’re getting some warning that yes, inflation may be back.”