WARSAW (Bloomberg) -- Poland’s manufacturing industry shrank in July at the slowest pace since June 2008 and the inflation rate probably was unchanged last month, suggesting the economy may be picking up and borrowing costs won’t go lower.

The PMI index improved to 46.5 from 43 in June, London- based Markit Economics said in an e-mailed statement today, better than the median estimate of 43.6 in a Bloomberg survey. A reading below 50, where the index has hovered for the past year, indicates a contraction. At the same time, the Finance Ministry forecast the inflation rate to be 3.5 percent.
Poland is the only country of the European Union’s 10 eastern members to have avoided a recession and the government has resisted the temptation to increase state spending to combat the global downturn. Signs of growth may prompt the central bank to refrain from cutting its benchmark rate any more for now, after four reductions this year.
“If the Ministry’s forecast is correct, the probability of interest-rate cuts is diminishing as it would be difficult for policy makers to justify them as long as the inflation rate doesn’t lower to 3 percent,” said Jaroslaw Janecki, the chief economist at Societe Generale in Warsaw. The PMI report signals “an improvement in the real sector and industrial output should be better in coming months.”
Second-quarter growth
The economy expanded an annual 0.8 percent in the first three months and probably grew at a similar pace in the second quarter, according to the Warsaw-based Central Statistical Office. The Monetary Policy Council left the benchmark seven-day reference rate last month at a record-low 3.5 percent to assess the effect of previous reductions, while the economy looks set to sustain growth.
“The PMI and inflation date are only strengthening the view that August will not be a month of official rates being cut,” Grzegorz Ogonek, an economist at ING Bank in Warsaw, wrote in an e-mailed comment.
The International Monetary Fund may upgrade its 2009 and 2010 economic growth forecast for Poland “in the autumn,” Katarzyna Zajdel-Kurowska, who represents Poland at the IMF, told today’s Rzeczpospolita in an interview. The IMF predicts a 0.7 percent economic decline this year and 1.5 percent growth in 2010.
The Polish zloty climbed to its strongest level in 6 1/2 months against the euro to 4.12 as of 12:25 p.m. in Warsaw after the release of PMI data.
No room
A majority of policy makers want to keep the benchmark interest rate unchanged, central banker Dariusz Filar said on July 30, adding there isn’t room for a rate cut “now.” According to a Bloomberg July 29 survey, four of nine economists expect rates to stay unchanged by the end of this year, while the five remaining forecast a quarter-percentage reduction no earlier than in September.
The council next meets to discuss rates on Aug. 25-26.
Policy makers shouldn’t read too much into positive PMI data because the economic recovery will be slow because of slack global demand, while the strengthening zloty and weak domestic demand will keep inflation tame, said Michal Dybula, the chief economist at BNP Paribas in Warsaw.
“The central bankers should maintain an easing bias in the monetary policy as long as the situation on the labor market is worsening and inflationary pressure is below zero,” he said, adding that the July PMI result indicates only a stabilization of manufacturing activity at a low level.
No threat
Dariusz Winek, the chief economist at Bank Gospodarki Zywnosciowej in Warsaw, said there is no threat to the inflation outlook from the demand side and it may be spurred only by commodity prices. He sees an increase of excise tax on tobacco as the main component to keep inflation at the top limit of the central bank’s targeted range of 3.5 percent.
The Central Statistical Office will report July inflation data on Aug. 13.
Winek estimates the inflation rate may fall to 3.2 percent this month or in August, prompting the Monetary Policy Council to decide on a rate cut in September, especially if the second- quarter economic growth report due Aug. 28 shows weak domestic demand.
Dybula expects central bankers to lower borrowing costs after the Narodowy Bank Polski releases its inflation outlook in October.