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Gilowska Says Polish Rate Cut ‘Premature,’ Zloty Will Weaken

Oct. 12 (Bloomberg) -- Poland’s central bank cutting interest rates would be “premature” as inflation remains faster than policy makers’ target and the zloty is set to weaken, rate setter Zyta Gilowska said.

“Inflation isn’t slowing enough to start talking about an interest-rate cut,” Gilowska, a member of the central bank’s Monetary Policy Council, said yesterday in an interview in Warsaw. “I still think expectations for one are definitely premature and their likelihood hasn’t increased an iota since August, when I first pointed this out.”

The Narodowy Bank Polski has kept the seven-day interest rate at 4.5 percent since June after raising it four times in the first half of the year. The increases to date, combined with a weaker economy, should help drop the inflation rate near the central bank’s target of 2.5 percent in the medium term, the bank reiterated last week.

Gilowska said a second reason for policy makers to refrain from easing is a general weakening of emerging-market currencies, including the zloty. The zloty has declined 7.4 percent against the euro since June 30, the third-biggest fall among emerging-market currencies tracked by Bloomberg.

The currency traded at 4.31 per euro at 1 p.m. Warsaw time, up from 4.322 late yesterday. The yield on the government’s 10-year bond fell 4 basis points from yesterday and was 5.67 percent.

‘Bucking the Trend’

“We’re bucking the global trend in trying to stabilize the currency and it’s clear such efforts will be completely ineffective in the long term,” Gilowska said. “That means the zloty will depreciate, too, and that fact needs to be considered as an important argument against cutting interest rates.”

In addition to the global trend, Polish policy makers should expect a possible “attack on the zloty” at the end of the year as markets will test the government’s determination to defend the currency from weakening to a level that would boost Polish zloty-denominated debt above the European Union limit of 60 percent of gross domestic product, Gilowska said.

A depreciation in the zloty of 10 percentage points would increase Poland’s debt ratio, now at 57 percent of GDP according to EU accounting rules, by 2 percentage points of GDP, according to Gilowska.

“This is an extremely risky situation,” she said. “We have to assume that markets could stage an attack on the zloty, because they know very well that the government will defend the currency at a level that will prevent a breach of the 60 percent limit.”

Budget concerns

With public debt getting “dangerously close” to 60 percent of gross domestic product, the “unrealistic” assumptions the 2012 budget is based on and the lack of a “credible” fiscal consolidation plan from Prime Minister Donald Tusk, Poland’s credit rating may be cut, Gilowska said.

“Such risks, especially in the light of the European financial crisis, weigh seriously on Poland’s perception,” she said. “Without government action to defend Poland from the crisis effects, its credit rating may be cut.”

Polish government debt is rated A- by Standard & Poor’s and Fitch Ratings, four steps above junk, and at A2 at Moody’s Investors Service. The country’s rating outlook may come under pressure unless the government presents “contingency plans” to reduce the budget deficit as economic growth slows, she said.

Poland’s economy won’t suffer as much from the euro-area slowdown as predicted by some economists, who are forecasting expansion of less than 2 percent next year, Gilowska said. Poland’s growth “will most likely” slow to 3 percent next year, below the government’s 4 percent target, she said.

To contact the reporter on this story: Dorota Bartyzel in Warsaw at

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