Polish Rates Show Mistrust of Cheap Money, Adviser Says

Poland’s central bank should stay wary of “cheap money” and eschew negative interest rates even if portfolio investors accuse it of being too conservative, an adviser to Governor Marek Belka said.

“Negative rates are the wrong way to stimulate the economy and our policy is to mistrust cheap money,” Halina Wasilewska-Trenkner said in an interview in Warsaw yesterday. “Poland is being described as conducting a conservative or even academic monetary policy simply because we’re taking the elementary precaution of avoiding negative real interest rates.”

While central banks across the world are undertaking the broadest reduction in borrowing costs since 2009 to avert a global slump stemming from Europe’s sovereign-debt crisis, the Narodowy Bank Polski is keeping interest rates at their highest since 2009 for a second year.

The bank raised its interest rates by a quarter-point in May to 4.75 percent after keeping it unchanged for almost a year following a combined 1 percentage-point increase. Still, Polish consumer prices are rising at the second-fastest pace in the 27-nation EU, even as the European Commission forecasts the nation’s economic growth will slow to 2.7 percent this year from 4.3 percent in 2011.

“Borrowing costs can’t be absurdly high, but real interest rates in Poland, while positive, they’re also close to zero,” said Wasilewska-Trenkner, an adviser to Belka who was on the rate-setting Monetary Policy Council from 2004 to 2010.

Growth Concerns

The zloty traded at 4.1565 per euro at 3 p.m. in Warsaw, rising for a fifth session and gaining 5.8 percent since the start of June. The zloty is the fourth-best performer among 25 emerging markets currencies tracked by Bloomberg. The yield on the government’s 10-year bond was at 4.865 percent, near the lowest level since March 2006.

Concern about economic growth has overshadowed inflation, a “short-term” perspective dominant on financial markets, Wasilewska-Trenkner said. Low inflation helps ensure investment returns and policy should be aimed at avoiding a sharp slowdown in the economy in the long term, she said.

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 and will be at 3.9 percent at the end of this year. That means consumer-price growth will exceed the central bank’s 2.5 percent target for at least 27 months.

“Poland is a small, open economy that is vulnerable to huge external shocks through both the trade and financial channels,” Wasilewska-Trenkner said. “This dependency means we need to pick our policy tools according to the situation and that is why the MPC is justified in retaining its language about the possibility of another rate increase should the inflation outlook deteriorate.”

Foreign Investors

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. Investors turning to emerging markets for higher returns boosted non-resident holdings of Polish debt to 30.7 percent of 523 billion zloty ($104.5 billion) in outstanding debt at the end of April, up from 25 percent at end-2010, the latest data show.

“Because the Council is striving to bring inflation back to the target, bank depositors know that their savings are being protected and investors can feel more secure about their anticipated rate of return,” Wasilewska-Trenkner said. “Efforts to stabilize the currency don’t make it easy to speculate, so our vigilance isn’t popular with short-term financial investors. And not well understood.”

Bond Yields

Forward-rate agreements, used to speculate on official borrowing costs, are showing a quarter-point rate reduction within three months for the first time since 2009, according to data compiled by Bloomberg. Poland’s 10-year zloty bond yields tumbled 61 basis points in the last two months to a six-year low of 4.86 percent yesterday, widening the discount relative to comparable Italian euro-denominated notes to a six-month high of 115 basis points on July 16, the data show.

“We don’t really need to look much backward to see that market expectations were wrong for most of the past 12 months,” Jaroslaw Janecki, chief economist at the Warsaw unit of Societe Generale, said by the phone today. “There isn’t any justification for immediate reversing of rate policy.”

Vote Breakdown

Eight of the 10 members on the Monetary Policy Council, including Belka, supported the May rate increase. Since then, only Elzbieta Chojna-Duch and Andrzej Bratkowski, who both rejected the motion, have repeatedly urged reversing the decision as early as September.

Policy makers also voted on a rate-increase motion at their July 3-4 meeting, Chojna-Duch said in TVN CNBC yesterday. A breakdown of the balloting will be available on Aug. 16, according to the central bank.

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. Central banker Andrzej Kazmierczak, in a July 16 interview, acknowledged policy makers had “moderated” their rhetoric since the May increase, “but the bank’s new inflation forecast alone doesn’t warrant a rate cut.”

Jan Winiecki told TVN CNBC on July 13 he sees no reason to lower interest rates for now as he “isn’t convinced that the country’s inflation has started slowing.”

‘Irresponsible’ Approach

Anna Zielinska-Glebocka, another policy maker, told TVN CNBC today that “it would be irresponsible” for the central bank to commit to cutting borrowing costs solely in response to an economic slowdown, as it must consider a wider range of indicators as well as global economic uncertainty.

“We still expect a majority of the Council will be reluctant to ease monetary policy before year-end, unless the risks of a more substantial slowdown intensify,” Piotr Kalisz, chief economist at Citi Handlowy in Warsaw, said by phone today.

Wasilewska-Trenkner said Polish policy makers currently have a “neutral” bias and may opt to increase or cut rates.

“The real baseline scenario is being set by the day-to-day decisions being taken at the U.S. Federal Reserve and the European Central Bank,” she said. “That means rate decisions in Poland will be determined not just by the economic data, but by a single political event abroad that could sway us one way or the other.”

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