Draghi Buys Belka Time on Economy Before Rate Cut: Poland Credit

Mario Draghi is buying Poland’s Central Bank Governor Marek Belka time to weigh whether he needs to cut interest rates to counter the economic fallout from the euro region debt crisis.

The yield on the government’s five-year zloty bonds jumped five basis points yesterday to 4.21 percent, the biggest daily increase since Sept. 14, according to data compiled by Bloomberg. The spread over similarly-dated German bunds widened to a 10-day high after Belka and his council kept Poland’s main rate at a three-year high of 4.75 percent yesterday.

While most analysts surveyed by Bloomberg predicted Poland to cut rates, Belka said policy makers will ease if data confirm that growth is slowing. The European Central Bank, led by Draghi, has cut borrowing costs to record lows and plans to resume buying government bonds to resuscitate Europe’s economy, helping to boost sentiment to riskier assets including Polish bonds.

“The latest ECB decisions have alleviated pressure on Poland and helped to curb the risk premium,” Guillaume Tresca, a Paris-based emerging-market strategist at Credit Agricole CIB, said in e-mailed comments yesterday. “The ECB has given some time to Poland’s central bank” which is waiting for “consistent data” to cut rates, he said.

‘Unequivocally Positive’

Eight out of 35 economists expected policy makers to keep rates unchanged yesterday, while the remaining 27 forecast a quarter point reduction that would narrow Poland’s 400 basis point, or 4 percentage point, gap over the ECB’s main rate, the most since 2005.

Belka’s 10-member policy council “will ease monetary policy” should next month’s inflation projection by the central bank and data “confirm” that the economic slowdown is becoming “protracted,” while the risk of increase in inflationary pressure is limited, it said in a statement yesterday.

Draghi’s bond-buying plans, aimed at lowering borrowing costs of the most indebted single currency nations, give euro members “time to make the necessary changes to their economies,” Belka told reporters yesterday. “At the same time, it stabilizes the atmosphere in financial markets, and that for us is unequivocally positive.”

Polish 10-year bond yields fell 23 basis points to 4.74 percent since Draghi said on July 26 that he would do “whatever it takes” to save the 17-nation euro region.

Targeting Inflation

Poland’s inflation stood at 3.8 percent in August, tied for fourth-highest among 27 European Union nations, according to data compiled by Bloomberg. Belka and his colleagues increased interest rates by a quarter point in May, the only EU member to tighten monetary strings in 2012, to help combat price growth which has been above their 2.5 percent target since 2010.

Gross domestic product slowed to 2.4 percent in the second quarter, the least since 2009, after growing 3.5 percent in the January-March period, as companies and consumers scaled back spending amid the euro-area debt crisis. Industrial output rose at the lowest rate since October 2009 in August, while the country’s purchasing managers’ index deteriorated for a sixth month in September, falling to the lowest since July 2009.

“The economy is slowing fast, and with the delayed rate cut it will slow faster,” Gyula Toth, who helps manage 220 million euros ($284 million) at Ithuba Capital in Vienna, said in e-mailed comments yesterday. “To boost growth the central bank will have to cut rates by 25 basis points in November and a total of 75 or 100 basis points over the next six months.”

‘Credibility’ Issue

Forward rate agreements, used to speculate on interest rate levels, were 79 basis points below the Warsaw interbank offered rate, signaling bets on three quarter-point rate cuts over the next six months, data compiled by Bloomberg show.

Poland’s economy “desperately needs” lower interest rates while policy makers’ maintain their tough stance on inflation at a time European central banks seek to bolster growth, former central bank council member Boguslaw Grabowski said yesterday.

“This hurts their credibility and makes it harder for Governor Belka to manage a council with a credibility problem,” Grabowski, an economic adviser to Prime Minister Donald Tusk, said in an interview on TVN CNBC yesterday.

The cost to insure Polish government debt against non- payment for five years using credit-default swaps was unchanged at 112 basis points at 10:12 a.m. in Warsaw, data compiled by Bloomberg show. The swaps cost 91 basis points less than the average for countries in eastern Europe, the Middle East and Africa in the Markit iTraxx SovX CEEMEA Index, compared with a gap of 78 basis points on average in the first half of 2012.

Extra Yield

The extra yield investors demand to hold Polish dollar bonds rather than U.S. Treasuries fell four basis points to 142 yesterday, down from 310 at the end of 2011, indexes compiled by JPMorgan Chase & Co. show. The additional yield on Polish 10- year zloty bonds over German bunds widened three basis points to 329, while the zloty was little changed at 4.0822 per euro.

The central bank’s last inflation report, published in July, forecasts price growth at an average of 3.9 percent this year and 2.7 percent in 2013. Belka’s projection has economic growth of 2.9 percent in 2012 and 2.1 percent next year, while the government sees expansion at 2.5 and 2.2 percent.

“It’s better to cut in November, when the inflation report comes out,” Viktor Szabo, who helps manage $9.3 billion in emerging-market debt at Aberdeen Asset Management, said by in e- mailed comments to Bloomberg yesterday. “That’s how it’s done in an inflation-targeting regime.”

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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