Polish Central Bank Unifies as End of Tightening Approaches

Bank of Poland Governor Marek Belka
Bank of Poland governor Marek Belka. Photographer: John Guillemin/Bloomberg

Polish central bankers are uniting to assure investors they will soon stop raising borrowing costs after months of disconnect with markets about the future direction of rates.

The pace of consumer-price increases will peak in two months and interest rates aren’t on “a new trajectory,” Narodowy Bank Polski Governor Marek Belka said on May 21. The bank’s July inflation forecasts may change its policy bias and the end of rate increases is in sight, rate-setter Jerzy Hausner said on May 30. Policy makers will start a two-day meeting to discuss rates tomorrow.

“They do seem to be singing off the same hymn sheet,” said David Oxley, an emerging-markets economist at London-based Capital Economics Ltd. “At the start of the year it was getting a bit ridiculous, it was just all over the shop. They have improved quite a bit.”

Investors in the derivatives market have reduced expectations for higher rates in Poland since the central bank surprised economists by raising its benchmark rate by a quarter-point last month, betting on two more increases this year. The spread between six-month forward-rate agreements and the three-month Warsaw interbank-offered rate narrowed to 0.59 percentage point from 0.66 percentage point on May 11.

Accelerating inflation and wage growth in Poland, the European Union’s largest eastern member, prompted the central bank to raise borrowing costs three times since January. The concentrated effort after the unexpected tightening last month is helping economists gauge the scope of further increases, said Bartosz Pawlowski, BNP Paribas SA’s London-based head of strategy for Central and Eastern Europe, Middle East and Africa.

‘Consistent Message’

“We hear this consistent message that this is just speeding up the tightening rather than hiking more,” Pawlowski said. “My interpretation is that there’s some sort of a consensus. They are giving a message that we are probably going to stop hiking interest rates after the next one or two rate hikes.”

The central bank may increase its benchmark seven-day rate by a quarter-point to 4.5 percent this week, according to 17 of 24 economists in a Bloomberg survey. The decision will be announced on June 8.

It raised the rate by the same amount on May 11 after inflation advanced to a 2 1/2-year high of 4.5 percent in April, surprising 24 out of 31 economists, who predicted the bank would rely the zloty’s strength to combat price gains.

The pace of consumer-price growth, which has exceeded the bank’s 2.5 percent target for seven months, may drop “close” to the goal late next year, Belka said on May 21.

Window of Opportunity

The window of opportunity to boost rates will close soon as the last increase in a tightening cycle traditionally coincides with the peak in inflation, Pawlowski said.

During the last wave of rate increases, the bank raised its benchmark to 6 percent in June 2008. Inflation peaked a month later at 4.8 percent and borrowing costs remained unchanged until a cut in November. The central bank also finished raising rates in August 2004, a month after inflation reached its highest that year at 4.6 percent.

Investors failed to predict the May rate move because they were “wrong” to assume that an agreement between the government and central bank to convert the euros Poland receives from the EU in currency markets was a substitute for rate increases, Belka said.

Motions Fail

The unexpected rate increase followed five months last year when economists had difficulty in timing the first tightening since June 2008 before the bank started lifting borrowing costs on Jan. 19.

Several rate setters who warned that a pickup in growth and inflation justifies tightening monetary policy “in the near future” kept rejecting motions to raise rates, according to a Jan. 20 central bank report. The Monetary Policy Council has since lined up to temper investors’ expectations of how high rates have yet to go.

Rates can’t be lifted “too far” because economic growth is set to slow, Andrzej Bratkowski, a council member, told the PAP news service on May 19. The bank adopted a new “tactic” of speeding up rate increases to limit their scope, Hausner told PAP on May 23. The unemployment rate at a 4-year high limits wage demands and the need for higher rates, council member Elzbieta Chojna-Duch said in an interview on May 25.

Yields have risen for short-dated Polish government bonds and dropped on longer dates ones, flattening the yield curve. The spread between two-year and 10-year bond yields narrowed to 102 basis points, from 109 basis points before the last rate increase. A basis point is 0.01 percentage point.

“The MPC is now presenting a uniform stance and it’s pretty readable,” Monika Kurtek, chief economist at Bank Pocztowy in Warsaw. “Speeding the process of tightening means we may not see many more hikes.”

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