Poland Leaves Rate Unchanged as Euro Crisis Damps Growth

Poland Holds Key Rate at 4.75% as Debt Crisis Weighs on Growth
Poland's central bank, which last year raised rates by a total of 1 percentage point and then kept them at the highest level since 2009 for 10 months, claims price stability as its prime responsibility. Photographer: John Guillemin/Bloomberg

Poland’s central bank, the only one in the European Union to raise borrowing costs this year, left the benchmark interest rate unchanged as the sovereign-debt crisis weighs on growth in the EU’s biggest eastern economy.

The Narodowy Bank Polski, which surprised the market with a quarter-point increase in May, kept its benchmark rate at 4.75 percent today, in line with the forecasts of all 34 economists surveyed by Bloomberg News.

The rate-setting Monetary Policy Council refrained from altering borrowing costs for a second month as it assesses the impact of the euro-area debt crisis. Polish consumer prices are rising at the third-fastest pace in the 27-nation EU even as the European Commission forecasts economic growth will slow to 2.7 percent this year from 4.3 percent in 2011.

“We do see significant signs of a slowdown, in the economy worldwide,” Governor Marek Belka said at a news conference in Warsaw today after the rate decision. “I would not go so far as to say that we are completely changing our outlook,” though “should that worse scenario materialize, then most probably our propensity to increase interest rates will be weaker.”

The zloty, which was little changed after the decision, traded at 4.2128 per euro in Warsaw at 4:15 p.m., down 0.45 percent on the day. The average yield on the two-year government bond was up two basis points at 4.62 percent, according to data compiled by Bloomberg.

Inflation Outlook

Poland’s central bank cut its forecast for inflation and economic growth in 2012-2014 and said price growth will slow gradually to near its 2.5 percent target next year, according to an e-mailed statement after today’s rate decision.

The central bank said inflation will average between 3.6 percent and 4.2 percent this year, compared with its previous projection in March of 3.6 percent to 4.5 percent. Price growth will slow to a range from 2 percent to 3.4 percent in 2013, compared with an earlier 2.2 percent to 3.6 percent projection.

“In the medium term, the economic slowdown amid fiscal tightening and interest-rate increases implemented in 2011 and 2012 will be conducive to inflation returning to target” next year, the central bank said in the statement.

The NBP said it forecast economic growth at 2.3 percent to 3.6 percent this year, compared with an earlier view of growth between 2.2 percent and 3.8 percent. Its forecast for 2013 economic growth was 1 percent to 3.2 percent, compared with 1.1 percent to 3.5 percent in the March projection.

Price Stability

The central bank, which last year raised rates by a total of 1 percentage point and then kept them at the highest level since 2009 for 10 months, claims price stability as its prime responsibility. Inflation has exceeded 3.5 percent, the upper end of the bank’s tolerance limit, since January 2010.

The Czech central bank cut its main interest rate to a record low of 0.5 percent last week. The European Central Bank kept its benchmark interest rate at 1 percent last month, matching a record low, with President Mario Draghi saying “a few” officials had opted for a cut. The Frankfurt-based ECB will hold its next assessment tomorrow.

In comments since the June meeting, policy makers had given mixed signals. Adam Glapinski and Andrzej Kazmierczak advocated further tightening, saying the economic slowdown was moderate. Elzbieta Chojna-Duch and Andrzej Bratkowski, who opposed the May rate increase against eight other MPC members led by Belka, suggested a rate cut was possible.

‘Sharp Disagreement’

“A sharp disagreement about the direction of policy has become apparent, with both rate hikes and rate cuts being considered,” Michal Dybula, an emerging-market strategist at BNP Paribas in Warsaw, said by phone before the rate decision. “Growth is slowing and the outlook is weak, so we no longer forecast a hike, while inflation bouncing back above 4 percent in the summer will support MPC hawks.”

Domestic and euro-region data released since the last rate meeting suggest that Poland’s slowing economy is at risk of worsening. Germany, which buys a quarter of Polish exports, saw its industrial output shrink 2.2 percent in April, while its business-climate index dropped to the lowest since March 2010.

Polish job growth at companies with more than nine workers held at a two-year low in May, wages increased less than forecast and retail sales rose at half the pace from a year earlier. May price growth excluding food and energy slowed to a 13-month low of 2.3 percent, while households’ inflation expectations declined in June to 3.7 percent, the lowest in 18 months. Inflation eased to a 15-month low of 3.6 percent in May.

“The whole series of statistics from the real economy is giving bankers enough room to hold off raising rates,” Wojciech Matysiak, an economist at Bank Pekao in Warsaw, said by phone on June 29. “We’re getting closer to a situation where the weak economy is trimming consumer-price growth, which is natural but wasn’t happening for quite a while.”

‘More Headwinds’

Economic growth will slow to 2.5 percent in the second half of 2012 from a year earlier, compared with 2.9 percent in the first six months, according to the median estimate of 27 economists surveyed by Bloomberg News. The EU’s largest eastern member expanded 4.3 percent in 2011 and will grow 2.7 percent this year, according to the European Commission.

“With more headwinds from the euro-zone crisis likely to come, as well as growing evidence of a sharp deceleration in the Polish construction sector, it is difficult to expect a rebound of the economy any time soon,” said Dybula of BNP Paribas.

Dybula withdrew his rate-increase forecast on June 28, joining a group of 21 economists predicting that borrowing costs will be left unchanged this year, according to a Bloomberg News survey. Two economists expect the rate to be raised to 5 percent in the third quarter.

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