Polish central bank Governor Marek Belka signaled that the end of monetary easing may be nearing after policy makers cut borrowing costs to a record low as the economy grapples with its worst slowdown in four years.
The Narodowy Bank Polski in Warsaw lowered the reference rate by a quarter-point to 2.75 percent today, matching the estimate of 38 of 40 economists surveyed by Bloomberg. The central bank will give more “decisive” guidance on its future policy next month after receiving new projections for inflation and growth, Belka said after the decision.
“It would be an over-interpretation to say the easing cycle has ended,” Belka told reporters in Warsaw. “The cycle is coming to an end, but we’re not there yet. We are close to an interest rate level that the majority of policy makers would regard as adequate.”
Policy makers have reduced borrowing costs by two percentage points since November to battle the slowdown. The easing reduces the risk of inflation remaining below the bank’s 2.5 percent target and supporting growth, the Council said in today’s statement.
The zloty extended a decline after Belka’s comment, trading 0.8 percent lower at 4.2715 per euro at 5:07 p.m. in Warsaw. The yield on the two-year government bond rose two basis points to 2.69 percent.
The central bank has cut borrowing costs 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 is at the slowest in seven years.
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 exports 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.
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 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.
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.
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