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Poland Delivers First Rate Cut Since 2009 as Growth Slows

Poland Delivers First Rate Cut Since 2009 as Economy Weakens
A visitor approaches the headquarters of Poland's central bank is seen in Warsaw. Photographer: Bartek Sadowski/Bloomberg

Poland’s central bank cut borrowing costs for the first time since 2009 as the European Union’s biggest eastern economy slows amid the euro-area debt crisis.

The only central bank in the 27-nation EU to raise rates this year lowered the benchmark 25 basis points to 4.5 percent, in line with forecasts of 34 economists surveyed by Bloomberg. One predicted a 50 basis-point cut.

While central banks around the world have eased monetary policy to avert a recession, Poland raised rates by a quarter-point in May after inflation exceeded its 2.5 percent target for two years. Pressure to reverse the move grew after economic growth decelerated in the second quarter to the weakest since 2009 and inflation eased.

“The decrease in interest rates should support economic activity and thus reduces the risk of inflation falling below the target in the medium term,” the central bank’s Monetary Policy Council said in a statement. “Should incoming data confirm a protracted economic slowdown, and should the risk of an increase in inflationary pressures remain limited, the council will further ease monetary policy.”

The Monetary Policy Council lowered its range for 2012 inflation to 3.7 percent to 3.9 percent, compared with a July projection of 3.6 percent to 4.2 percent, according to the statement.

Industry Shrinks

Policy makers signaled last month they may cut borrowing costs if the economy slowed further, as statistical data have since confirmed. Industrial output shrank 5.2 percent in September, the first fall since May 2009, while retail sales grew at the slowest pace since August 2010.

The zloty traded at 4.1441 per euro at 4:49 p.m. in Warsaw, down 0.6 percent from the previous close. The yield on zloty-denominated two-year bonds jumped as high as three basis points to 3.854 percent after the decision and was down one basis point from the previous session.

Three-month forward-rate agreements were 60 basis points below the three-month Warsaw Interbank Offered Rate, unchanged from yesterday, implying a half-point in reductions by the end of January. In August, they indicated expectations for a quarter-point cut within three months, data compiled by Bloomberg showed. Twelve-month FRAs were at 101 basis points below the three-month Wibor, signaling bets of four quarter-point reductions within a year.

‘How Far’

“The only question now is how far and how long this easing cycle will last,” Timothy Ash, head of emerging-markets research at Standard Bank Plc in London, said in an e-mail. “A lot depends on the zloty. It seems very strong in my mind.”

While the U.S. Federal Reserve is pursuing a third round of so-called quantitative easing and the European Central Bank unveiled an unlimited debt-purchase plan in September, Poland’s central bank said last month it would wait for updated forecasts before easing.

Poland’s inflation rate was 3.8 percent for a second month in September, while the fourth quarter should bring an “evident decline” in the annual rate, “perhaps even to below 3 percent by year-end,” the Finance Ministry said Oct. 15. The central bank’s 2.5 percent price-growth target allows a divergence of plus or minus 1 percentage point.

‘Slow Significantly’

“While headline inflation remains well above target, it will probably slow significantly in the coming months and return to the target in the first half of 2013,” Maja Goettig, a Warsaw-based strategist at KBC Securities, said by phone.

Prime Minister Donald Tusk’s government is sticking to its 2.5 percent growth forecast for 2012, while trimming next year’s outlook to 2.2 percent from a previously predicted 2.7 percent. Tusk warned last month that 2013 “will be another critical year, although nobody knows to what extent” growth will be damped by the euro-area’s debt crisis.

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. The European Central Bank forecasts a 0.4 contraction this year for the euro-area economy. Poland’s gross domestic product expanded 2.3 percent from a year earlier in the March-June period, the slowest pace in 11 quarters.

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