Poland inflation surprised on the low side in May, remaining deep in deflation. It was down -0.9% y/y, slightly higher than last month's -1.1% y/y but lower than the consensus.



The key reason was an unexpected, modest monthly decline in food inflation, instead of an increase expected. This kept food deeply in deflation at -2.2% y/y. Fuel prices continued to increase due to higher global energy prices, but overall are also still in deflation. Clothing and footwear, household equipment and miscellaneous were still in deflation too. Other categories remained low, between 0-1.3% and thus still below the 1.5-3.5% target. Only communication costs at +4.6% y/y was above the target.



"We expect inflation to gradually increase towards zero by end-2015 and to 2% at end-2016. This gradual acceleration will allow the NBP to keep its 1.5% policy rate on hold at least until mid-2016 by which time the MPC will be totally reconstituted. The NBP is not inclined to lower rates further, although it could. Instead, it prefers to keep the rate relatively high and thus delay the hiking cycle for longer, allowing growth recovery to prosper." said Barclays Capital