Poland Must Hold Rates to Shield Zloty, Kazmierczak Says

Poland’s central bank should refrain from reducing borrowing costs at least until the end of the year to shield the zloty and banks from capital outflows, policy maker Andrzej Kazmierczak said.

The Narodowy Bank Polski, the only central bank in the European Union to raise interest rates this year, shouldn’t “rush” to lower them with inflation unlikely to return to the bank’s 2.5 percent target this year even as Poland’s slowing economy risks worsening, Kazmierczak said in an interview in Warsaw yesterday.

“The process of draining capital deposited in the Polish banking system has begun,” Kazmierczak said, adding that 6 billion euros ($7.4 billion) had flowed out in the three quarters through March. “Given the dire situation of euro-area lenders, this process will not only continue, but will have an increasingly negative impact on Poland’s banks.”

Kazmierczak’s remarks put him at odds with fellow policy makers Elzbieta Chojna-Duch and Andrzej Bratkowski, who both signaled that borrowing costs may need to be cut after the central bank left its benchmark interest rate unchanged at 4.75 percent this month and in June following May’s quarter-point increase.

Polish consumer prices are rising at the second-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. Poland relies on the euro area to buy more than half its exports, while the parent banks of five of its seven largest lenders are based in the 17-nation currency bloc.

Currency Defense

“Monetary policy has to assume that the euro area’s banking crisis will deepen and spread, and that Polish banks will feel the pinch,” said Kazmierczak, a member of the rate-setting Monetary Policy Council. “Positive real interest rates are essential to defend the zloty” and “are also required for Polish banks in case they need to attract deposits on the local market to offset capital outflows.”

Poland had the EU’s worst-performing currency in May, when the zloty lost almost 5 percent. The zloty has since pared losses, trading at 4.17 per euro at 5 p.m. in Warsaw, up 0.5 percent from yesterday and more than 5 percent since the beginning of June. Yields on 10-year zloty bonds rose 2 basis points from 4.89 percent yesterday, the lowest since March 2006.

Higher Returns

Investors are turning to emerging-market debt for higher returns after government yields sank to record lows from the U.S. and Canada to the AAA-rated euro members, with German and Dutch Treasury bills trading at negative yields. Polish five-year credit-default swaps, which drop as perceptions of creditworthiness improve, declined seven basis points to 183, extending this year’s decline to 97 basis points, according to data compiled by Bloomberg.

“One can’t be certain that portfolio investors will remain eager to buy Polish bonds and that the speculative inflows we’re now observing will continue,” Kazmierczak said. “We have to mind the stability of the financial system and reinforce investor confidence. We also need to make sure that Polish households retain confidence in domestic banks and address foreign investors’ concerns about a possible depreciation of the zloty.”

Foreign investors’ net purchases of local-currency bonds exceeded 6 billion zloty ($1.8 billion) in May, the most in about 12 months, Deputy Finance Minister Dominik Radziwill said June 15. Non-resident holdings amounted to 30.7 percent of Poland’s 523 billion zloty of outstanding debt at the end of April, up from 25 percent at end-2010, the latest data show.

New Forecast

Poland’s central bank on July 4 cut its forecast for inflation, saying it will slow to near its target next year from 4.3 percent in June. The bank forecasts the economy will slow to 2.1 percent next year from 2.9 percent this year.

Speaking in Beijing on July 12, Governor Marek Belka said that because the Polish central bank doesn’t expect a pickup in price growth, it is free to use interest-rate cuts to stimulate the economy if needed.

Poland’s economy is slowing faster than the central bank’s latest July projections and growth will “certainly” be below the 2.9 percent forecast for 2012, policy maker Bratkowski said in an interview today on Obserwatorfinansowy.pl, a website operated by the central bank.

Applying Brakes

“Not everybody understands that we’re no longer talking about whether to stimulate or restrain economic growth; we’re debating how hard to apply the brakes on the economy to stop price growth that is mainly being imported,” Bratkowski said. “I don’t agree that our job is to focus purely on inflation and ignore economic growth.”

Investors in interest-rate derivatives expect the central bank’s reference rate to decline by almost half a percentage point by January from 4.75 percent now, based on the price of six-month forward-rate agreements. The contracts dropped to 42 basis points below the Warsaw interbank offered rate today, the widest gap since 2009 and compared with a nine basis-point spread a month ago, data compiled by Bloomberg show.

“One of the main driving factors behind zloty appreciation these days is demand for high yields,” Piotr Matys, a London-based economist at 4Cast Ltd., said in a report today. “But using the same argument, one could argue that fairly high interest rates will not offer the zloty enough insulation if the global crisis escalates.”

While Kazmierczak acknowledged policy makers had “moderated” their rhetoric since the May increase, he said the bank’s new inflation forecast doesn’t warrant a rate cut. If price growth remains at 4 percent or higher after the third quarter, the bank should increase borrowing costs, he said.

“If the inflation rate actually begins a sustained decline and the euro area doesn’t tip into an even deeper crisis, then a rate decrease could be considered, but no earlier than the beginning of next year,” he said.

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