Poland Poised to Cut Rates to Record as Recovery Remains Elusive

Poland’s central bank is set to cut borrowing costs to a record low as the European Union’s largest eastern economy grapples with its worst slowdown in four years.

The 10-person Monetary Policy Council will lower the reference rate by a quarter-point to 2.75 percent, according to 38 of 40 economists surveyed by Bloomberg. One sees a 50 basis-point cut and one predicts rates will stay unchanged. The decision is due at about midday in Warsaw, with Governor Marek Belka to hold a news conference at 4 p.m.

The cut will add to 175 basis points in monetary easing since November as the euro-area debt crisis curbed first-quarter growth to its weakest since 2009. While a report this week showed a contraction in manufacturing was moderating, inflation at the slowest in seven years is giving policy makers leeway to reduce interest rates further.

“Slow economic growth and a lack of price pressures will enable the central bank to continue the easing cycle through July,” Piotr Kalisz, chief economist for Poland at Citigroup Inc. in Warsaw, said by e-mail. “The economy will gradually start to improve afterwards and this should close the door for more cuts.”

Trading in overnight index swaps shows a 97 percent chance of a quarter-point reduction today and a 3 percent probability of no change, according to data compiled by Bloomberg. Traders are predicting at least 75 basis points in cuts through the end of the year, it shows.

‘Without Delay’

Central bankers across eastern Europe have been easing monetary policy to kick start flagging economic growth. Hungary cut its benchmark rate to a record-low 4.5 percent May 28, while Czech policy makers are considering selling the koruna to boost exporters after reducing borrowing costs to effectively zero.

Poland’s central bank, which raised rates last May even as the economic slowdown was under way, is facing outside calls to ease policy. The International Monetary Fund last month urged a reduction in interest rates “without delay” as the government’s ability to spur growth through spending is limited.

The Finance Ministry narrowed last year’s budget deficit to 3.9 percent of gross domestic product, missing EU requirements as the economic slowdown curbed tax revenue. It has until Oct. 1 to announce or take measures to trim next year’s gap to within the 27-member bloc’s 3 percent limit.

‘Ineffective Cuts’

Policy makers remain split about the need for further rate cuts. Jan Winiecki said last month that reductions would be “ineffective” in boosting investment. His colleague, Andrzej Bratkowski, called on May 22 for a 50 basis-point reduction in June as there’s “no way” the recovery will be speedy.

Economic growth slowed to 0.5 percent from a year earlier in the first quarter, the slowest pace in four years as the euro area, which buys more than half of Polish exports, remains stuck in a record-long recession.

GDP will rise 1.1 percent in 2013, the slowest in more than a decade, as domestic demand “continues to suffer,” according to Lars Christensen, chief emerging-markets analyst at Danske Bank A/S (DANSKE) in Copenhagen. It’s “difficult to see much help from the external environment,” he said June 3 in an e-mailed note.

Still, the trough may be near, according to HSBC Holding Plc. While the increase in May’s purchasing managers index, a gauge of manufacturing, to 48 from 46.9 in April kept it below the 50 threshold that signals expansion, it showed “signs of the downturn easing as new orders, output and employment all fell at slower rates,” it said June 3 in a statement.

Economic Revival

The economy should start to recover “later in the year,” depending on the performance of the euro area, the IMF predicts.

Market reaction to comments last week by U.S. Federal Reserve Chairman Ben S. Bernanke may also deter policy makers from further rate reductions. The zloty plunged to an 11-month low and Polish 10-year bond yields jumped to the highest since April 11 as some investors interpreted his remarks as a sign the central bank may slow the pace of its bond purchases should the world’s biggest economy improve.

Policy maker Elzbieta Chojna-Duch said last month that further cuts should be “cautious” as the central bank needs to maintain a “safety cushion” to protect against the risk of a pullout by foreign investors from Polish bonds.

“Increased expectations for the Fed scaling down quantitative easing combined with potentially overly aggressive monetary easing from the MPC could escalate the currency weakening and push bond yields higher,” Radoslaw Bodys, chief economist at PKO Bank Polski SA, said June 3 in an e-mailed report.

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

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

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