July 29 (Bloomberg) -- Poland’s central bank will leave interest rates unchanged today and may be near the end of a cycle of reductions as reports show the economy has hit bottom and may start recovering next year, two surveys showed.

The benchmark seven-day reference rate will be at 3.25 percent in December, compared with 3.5 percent now, according to the median estimate of nine economists in a Bloomberg survey. Four said rate cuts have finished after a central bank business confidence survey published on July 28 showed companies are more optimistic about the third quarter. In a separate survey, 18 out of 19 economists said the bank will keep rates on hold today.

“Economic recovery has clearly started,” said Ernest Pytlarczyk, an economist at BRE Bank in Warsaw. The central bank’s 10-member Monetary Policy Council, whose term ends early next year, won’t risk further easing with money market rates falling and the seven-day rate, adjusted for inflation, at zero.

That contrasts with Hungary, where policy makers lowered the benchmark rate two days ago by a percentage point, double analysts’ expectations, and forward-rate agreements prices show borrowing costs falling a further three quarters of a point in the next six months.

‘Not At Risk’

According to Deputy Finance Minister Ludwik Kotecki, Poland is not at risk of entering a technical recession, defined as two consecutive quarterly drops in gross domestic product. The annual inflation rate will fall by the end of the year, he said.

“GDP growth in coming quarters will be above zero, although below 1 percent,” Kotecki told the upper chamber of parliament, the senate, today. Full-year 2009 growth will be “around” the government’s forecast of 0.2 percent, he said, adding that this was “still a conservative estimate.”

Poland is the only country of the European Union’s 10 eastern members to have avoided a recession so far as the government has resisted temptation to increase state spending in the face of the global slowdown and the country’s larger domestic market makes it less reliant on exports.

The zloty dropped to 4.1942 against the euro as of 1:11 p.m. in Warsaw from 4.1786 late yesterday.

The bank’s index of the business outlook for the third quarter, compiled from a survey of 824 companies, increased 7.7 percentage points from the previous quarter to 0.3 percent, exceeding zero for the first time this year. Eighty percent of the companies said they expect to make a profit this year and see an end to the economic slowdown by 2010.

‘Decline Behind Us’

“This report confirms that the first stage of sharp decline is behind us,” said Arkadiusz Krzesniak, chief economist at Deutsche Bank in Warsaw.

The government downgraded its economic growth forecast in June to an annual 0.2 percent from 3.7 percent. The central bank, which expects 0.4 percent growth this year, trimmed the seven-day reference rate by two and a quarter percentage points to record low of 3.5 percent from a record high in November.

Still, improving business confidence and resilient industrial output have convinced some economists that gross domestic product may outperform those projections.

“We expect a series of positive surprises in coming months,” said Marcin Mrowiec, senior economist at Bank Pekao SA, in a research note yesterday. Pekao forecasts the economy will expand by 1.4% this year.

‘Key Figure’

“The key figure for central bankers will be second-quarter GDP” said Maja Goettig, chief economist at Bank BPH in Warsaw. “The business confidence report indicates the reading will be positive growth, which shoots down the doves’ arguments for further rate cuts.”

The Monetary Policy Council may follow the lead of the European Central Bank, which she expects to keep rates unchanged until it begins to increase borrowing costs at the end of 2010, Goettig said.

The arguments against further rate cuts may be backed by last week’s report on June retail sales, which rose for the third consecutive month. Industrial output shrank last month at the slower-than-expected pace of 4.3 percent.

Even so, Deutsche Bank’s Krzesniak sees room for two more rate reductions of a quarter of a point in September and November. They will be made possible by a decline in the inflation rate to 3 percent by December, from 3.5 percent in June, and “a very slow economic recovery” retarded by sluggish consumer and foreign demand.

The following is a list of forecasts by nine banks for Poland’s reference rate in December:

Bank BPH in Warsaw                      3.50%
Bank Millennium in Warsaw               3.50%
Bank Pekao in Warsaw                    3.50%
Bank Zachodni WBK in Warsaw             3.00%
BRE Bank in Warsaw                      3.50%
Deutsche Bank in Warsaw                 3.00%
ING Bank Slaski in Warsaw               3.00%
Raiffeisen Bank in Warsaw               3.25%
Societe Generale in Warsaw              3.25%

To contact the reporter on this story: Monika Rozlal in Warsaw at mrozlal@bloomberg.net Katya Andrusz in Warsaw at kandrusz@bloomberg.net

Last Updated: July 29, 2009 07:44 EDT