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Polish Rate Setter Calls for Biggest Rate Cut Since 2009

Poland’s central bank, which raised borrowing costs two months ago, has room to deliver the biggest cut in its main interest rate since 2009 to fight an economic slump, central banker Andrzej Bratkowski said.

“It would be justified to cut the rate by half a point at the September meeting,” Bratkowski told TVN CNBC television late yesterday. Economic growth will slow to less than 2 percent in the fourth quarter and will be “slightly” more than 2 percent for the full year, he said.

That would be the biggest reduction since the Narodowy Bank Polski lowered its benchmark rate by 75 basis points in February 2009 as the European Union slipped into recession. Poland was the 27-nation bloc’s only member to avoid a contraction that year. The economy is set to expand 2.7 percent this year, the slowest since then, according to the EU.

The central bank, which has kept its benchmark rate at 4.75 percent since May, doesn’t predict a pickup in inflation, leaving it free to cut interest rates to boost economic growth if required, Governor Marek Belka told journalists in Beijing yesterday. He also said economic growth may decelerate to about 2 percent “for one or two quarters,” adding that if that were to happen, the slowdown will be followed by a rebound.

‘Serious Risks’

“A half-point cut would mean the economy is weakening severely and for now nothing like that is happening,” Piotr Bielski, an economist at Bank Zachodni WBK (BZW) in Warsaw said in a telephone interview. “Bratkowski, though, clearly sees serious risks outside Poland and points to a necessity of considering that negative external environment in Polish monetary policy to a larger extent.”

The zloty traded at 4.2028, a 0.1 percent gain from late yesterday. The government’s 10-year bond yields fell to 4.968 percent, the lowest since April 2006.

Unlike most central banks from Brazil to Turkey, Polish policy makers have maintained a tightening bias, having raised rates in May by a quarter-point after inflation exceeded their target for 20 months. Belka said that time that “he hopes the sentence on possible tightening won’t disappear from the bank’s post-meeting statements as it would be a bad sign on the Polish economy.”

The Czech central bank cut its main interest rate to a record low of 0.5 percent on June 28. European Central Bank President Mario Draghi yesterday said inflation in the euro area is slowing faster than expected, justifying last week’s rate cut to a record low of 0.75 percent, when the ECB also reduced its deposit rate, which has steered market rates since the financial turmoil started, to zero.

‘Not Convinced’

The Polish Monetary Policy Council will hold its next rate meeting on September 4-5. None of eight rate changes passed by the council since the 75 basis-point cut in 2009 was bigger than a quarter point.

Jan Winiecki, another member of the rate-setting panel, today said he sees no reason to lower interest rates.

“I’m not convinced of the inflation slowing trend,” he said in an interview with TVN CNBC.

Forward-rate agreements, or FRAs, used to speculate on interest rates, dropped to 43 basis points below the Warsaw interbank offered rate at 9:30 a.m. in Warsaw, the most since April 2009 and showing expectations for a quarter-point rate cut within six months, according to data compiled by Bloomberg.

‘Full Justification’

The inflation rate will fall to 1.8 percent in 2014, below the central bank’s 2.5 percent target, from 2.7 percent in 2013 and 3.9 percent this year, according to updated inflation and GDP Projection published by the central bank July 9. Economic growth will ease to 2.1 percent in 2013 from 2.9 percent this year, before rebounding to 3 percent in 2014.

“The falling inflation rate, weaker economic growth and the government’s planned fiscal consolidation provide full justification for a preemptive rate cut,” Elzbieta Chojna-Duch, a member of the central bank’s Monetary Policy Council, said in an interview on July 9, citing the “unambiguous picture” provided by the bank’s forecast. She declined to say if she would submit a motion to lower borrowing costs adding that “a rate cut could occur this year.”

To contact the reporter on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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