Polish central banker Andrzej Bratkowski said he’ll seek a half-point cut in interest rates next month as prospects for a quick economic recovery fade.
The reference rate’s optimal level for the next several quarters is from “2 percent to 2.5 percent,” according to Bratkowski, one of 10 rate-setters on the central bank’s Monetary Policy Council. While the economy will probably bottom out in the second quarter, the recovery will be slow, he said yesterday in an interview in Warsaw.
Policy makers have cut interest rates by 175 basis points since November to a record-low 3 percent as the European Union’s largest eastern economy expanded at the slowest pace in four years in the first quarter. The International Monetary Fund last week urged policy makers to lower borrowing costs further “without delay” as the euro area’s longest-ever recession curbs demand for Polish exports.
“Another 50 basis-point rate cut is completely justified and I expect that will be my position at the June policy meeting,” Bratkowski said in Warsaw. “After that, we can be more cautious about whether to do another two smaller cuts. If nothing dramatic happens, we can afford to take smaller steps.”
Polish derivatives investors are betting on 34 basis points of cuts through August, according to the gap between three-month forward-rate agreements and the Warsaw Interbank Offered Rate. The zloty, the fifth-worst performer this year against the euro among emerging-market currencies tracked by Bloomberg with a 2.8 percent decline, extended its drop after Bratkowski’s comments, falling 0.4 percent to 4.2037 per euro, the lowest since Feb. 1.
Bratkowski has been among the most vocal supporters of monetary easing among Poland’s central bankers. He was the first to seek a half-point cut last July, two months after the panel voted to increase borrowing costs, according to voting records on the central bank’s website.
While the economy is poised to expand at its slowest pace in more than a decade this year and the inflation rate is the lowest in seven years, policy makers are split about the need for further monetary easing. Jan Winiecki said this week that rate reductions will be ineffective in boosting investment. Jerzy Hausner told TVN CNBC on May 20 that he doesn’t see large scope for cuts.
There are “some signs” the slowdown has reached the bottom as exports are no longer decelerating and slow inflation should encourage consumer spending, according to Bratkowski. Still, there’s “no way” the recovery will be speedy given the scope of the debt crisis in the euro area, which buys 52 percent of Polish exports, he said.
“The second quarter will be the weakest,” Bratkowski said. “After that, annualized growth should improve because the base effect of year-earlier growth will be in our favor.”
Polish industry grew 2.7 percent from a year earlier in April, less than economists forecast, while employment at companies with more than nine workers declined 1 percent. Retail-sales data for last month are due to be published tomorrow, with economists predicting a 1 percent annual decline.
Inflation (POCPIYOY) probably won’t experience a “quick uptick” after slowing to 0.8 percent from a year earlier in April, Bratkowski said. The central bank is targeting medium-term consumer-price growth of 2.5 percent with a tolerance range of 1 percentage point around that goal.
The inflation rate may dip “below zero” for one or two months if the EU economy remains weak and food and energy prices stay low, according to Bratkowski.
“That’s no tragedy, because it’s nonsense to think a country like Poland can get sucked into a deflationary spiral,” he said. “That shouldn’t happen.”
Gross domestic product advanced 0.4 percent from a year earlier in the first quarter, according to a flash estimate released last week by the statistics office. To kick start the economy, the central bank should use traditional monetary-policy tools to support domestic demand because net exports are the only growth engine at present, according to Bratkowski.
“The situation in Poland isn’t so dire that we need to jettison conventional policy and adopt an anti-inflation orthodoxy that conflicts with direct inflation targeting,” he said. “If that doesn’t work, then we can consider other means, although I personally don’t see any instruments that could boost lending.”
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