Poland Cuts Main Rate Second Month Amid Recession Threat

Poland Cuts Rates for a Second Month as Recession Threat Emerges
A security guard escorts visitors to the headquarters of Poland's central bank in Warsaw. Photographer: Bartek Sadowski/Bloomberg

Poland’s central bank cut borrowing costs for a second month and said it will ease policy further as the European Union’s biggest eastern economy faces the risk of its first recession in two decades.

The only central bank in the 27-nation EU to raise rates this year lowered the benchmark seven-day reference rate 25 basis points to 4.25 percent today, in line with the forecasts of 33 of 35 economists surveyed by Bloomberg. Two predicted a 50 basis-point decrease.

“The Monetary Policy Council is working hard and can’t afford a pause in easing,” Governor Marek Belka said at a news conference in Warsaw, adding there’s a “high probability” of another cut in January. “The situation’s serious, the slowdown considerable, but we’re far from believing that it’s dramatic.”

The Narodowy Bank Polski last month cut rates for the first time since 2009 and Belka announced the start of an easing cycle after economic growth slowed to the weakest pace in almost three years. Since then, inflation decelerated to below the upper end of the bank’s tolerance range for the first time in almost two years and the economy further deteriorated, prompting analysts including Marcin Mazurek at BRE Bank SA, the local unit of Commerzbank AG, to predict a recession next year.

The zloty pared gains after the announcement, trading down more than 0.1 percent at 4.1242 per euro at 4:30 p.m. in Warsaw. The currency has gained 8.3 percent against the euro this year, the world’s second-best performance after the Hungarian forint. The yield on two-year government bonds was up one basis point to 3.36 percent.

Bank Statement

“Should upcoming information confirm a protracted economic slowdown, and the risk of an increase in inflationary pressures remain limited, the Council will further ease monetary policy,” the central bank said in a statement. With growth set to remain moderate, there’s a “risk of inflation declining below the NBP’s inflation target in the medium term.”

Belka said that while some MPC members favor abandoning positive real interest rates in the face of the worsening economy, the central bank prefers a “gradual” approach to monetary easing. The bank doesn’t believe an economic recovery is imminent, he said.

Monetary easing over the next 12 months will total 150 basis points, according to BRE Bank’s Mazurek. That’s above the market expectations, even after traders boosted bets for monetary easing following the release of the third-quarter data.

Rate Forecasts

They now predict a total of 123 basis points in cuts over the next 12 months compared with 100 before, according to the gap between the equivalent forward-rate agreement prices and the Warsaw Interbank Offered Rate compiled by Bloomberg.

Inflation slowed to 3.4 percent in October from 3.8 percent a month earlier and will “record a remarkable decline in November,” according to Jaroslaw Janecki, Warsaw-based economist at Societe Generale, who expects the rate at 2.8 percent. If confirmed by the Central Statistical Office on Dec. 13, that would be a two-year low.

The central bank predicts consumer-price growth will decelerate to the 2.5 percent target next year, when the economy will expand 1.5 percent, the least since 2002. The central bank recognizes that inflation is slowing and some policy makers are concerned about the inflation forecast’s credibility, Belka said today.

Economic growth in the third-quarter weakened to 1.4 percent from a year earlier on a second straight decline in domestic demand, including a 0.1 percent increase in consumer spending. That was the lowest since the first quarter of 2003 as companies offered no new jobs for the past four months and inflation outpaced wage growth. Belka said that he’s “most concerned” by the demand drop.

“Consumers hit a wall,” Mazurek said. “In the fourth quarter, we’ll be able to refute the alleged impossibility of negative consumption growth in Poland.”