Poland Signals November Cut After Holding Borrowing Costs

Poland Unexpectedly Holds Interest Rates Even as Economy Slows
A security guard stands at the public entrance to the headquarters of Poland's central bank in Warsaw. Photographer: Bartek Sadowski/Bloomberg

Poland’s central bank signaled it may cut borrowing costs next month if the economy slows further after unexpectedly leaving them at the highest level since 2009 for a fourth meeting.

The Narodowy Bank Polski kept the benchmark seven-day interest rate at 4.75 percent yesterday. Eight economists in a Bloomberg survey predicted no change, while 27 expected a 25 basis-point reduction that would have reversed a rate increase in May, the only one by a central bank in the European Union this year. The NBP last lowered the benchmark in June, 2009.

While central banks around the world have eased monetary policy to avert a recession, Poland has kept rates at the highest in three years to tame inflation, even after Governor Marek Belka signaled the need to reduce them amid Europe’s debt crisis. Poland’s expansion eased in the second quarter to 2.4 percent from a year earlier, the slowest since 2009.

“Inflation is still high and we wanted to make sure the trend of weakening economic growth will persist,” Belka said at a news conference yesterday. The central bank “will ease monetary policy” next month should data show the economy slowing further and limited inflation risks, according to an e-mailed statement after today’s meeting.

The zloty traded at 4.091 per euro at 3:39 p.m. in Warsaw, down from 4.081 yesterday, when it rose 0.7 percent to post the biggest one-day gain in three weeks. The five-year government bond yield climbed 3 basis points to 4.24 percent.

Data Points

Consumer-price growth has exceeded the bank’s 2.5 percent goal since October 2010. While inflation slowed to 3.8 percent in August from 4 percent in July, the central bank forecasts it will remain above the target until early next year.

“They decided to err on the conservative side,” Lars Christensen, a Copenhagen-based economist at Danske Bank A/S, said by phone. The market “was aggressively priced for cuts and now we have to see why they’re hanging back, but 12 months ahead, we’ll still have rates 75 to 100 basis points lower.”

Zyta Gilowska, who sits on the 10-member Monetary Policy Council, remains in hospital and wasn’t present for today’s meeting, Belka said, adding that he didn’t know whether she will attend next month’s gathering. Gilowska backed tightening policy at least twice this year.

Recent data have added to signs that the EU’s biggest eastern economy is slowing. In August, Polish industrial output rose at the lowest rate since October 2009, while retail-sales growth slowed for a fourth month. Last month, manufacturing deteriorated for a sixth month, falling to the lowest level since July 2009, according to the purchasing managers’ index.

ECB Plan

While European Central Bank President Mario Draghi calmed markets roiled by the debt crisis last month by announcing a bond-purchase plan, the ECB still forecasts a 0.4 contraction this year for the euro-area economy, the main market for Polish exports. The 17-nation region’s jobless rate rose to 11.4 percent last month, the highest since the data began in 1995.

Even with the economy slowing and the euro area heading for a recession, Polish central bankers have been divided over whether to cut rates. Belka said last month that the need to ease policy was “obvious,” while council member Andrzej Kazmierczak said disinflation must be clearly sustained before any a rate reduction.

Future Moves

“The upcoming macroeconomic data will confirm that the economic slowdown is protracted, while the risk of an increase in inflationary pressure is limited,” Maciej Reluga, chief economist at Bank Zachodni WBK, said in an e-mailed note. “We are expecting a decision for a quarter-point cut in November and two more through the first quarter of next year.”

Three-month forward-rate agreements dropped to an average 49 basis points below the Warsaw interbank offered rate last month, the biggest gap since February 2009, signaling bets for almost two quarter-point rate reductions by the end of 2012, according to data compiled by Bloomberg.

Yesterday’s decision “makes it harder for Governor Belka to manage a council with a credibility problem,” Boguslaw Grabowski, a former central banker and economic adviser to Prime Minister Donald Tusk, said in an interview on TVN CNBC yesterday. “Monetary easing is desperately needed” and keeping borrowing costs unchanged “effectively tightened policy when you look at the effect on the zloty.”

Finance Minister Jacek Rostowski, in comments published yesterday by the Financial Times, said Poland’s “slowdown will be temporary” and the economy may return to robust growth as early as the end of next year.

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