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Draghi Sows Doubt Among Traders on Interest Rates: Poland Credit

A Polish pledge to keep interest rates unchanged until at least mid-2014 is in question after last week’s surprise cut by the European Central Bank.

While monetary policy makers in Warsaw said Nov. 6 that they would keep borrowing costs at a record-low 2.5 percent through June, trading in overnight index swaps shows a 42 percent chance of a quarter-point reduction by the end of March, up from 36 percent a month ago.

Central banks to the south and west of Poland are loosening monetary conditions as sluggish economies raise concern about falling rates of inflation and the effect on debt. Czech policy makers in Prague began unlimited koruna sales on Nov. 7, while ECB President Mario Draghi in Frankfurt oversaw the reduction in the benchmark euro-region borrowing cost to 0.25 percent. Forecasts released a day earlier showed Polish inflation will continue to undershoot policy makers’ target through 2015.

“There’s a chance of a further cut,” Dmitri Barinov, a fund manager who oversees $2.5 billion of debt at Union Investment Privatfonds in Frankfurt, said yesterday by e-mail. “Europe is still fighting with deflationary tendencies and it can reach Poland at some point as well.”

‘Gain Steam’

Policy makers led by Governor Marek Belka reduced rates by a total of 2.25 percentage points between November and July to reinvigorate an economy that’s poised to expand at its slowest pace in more than a decade in 2013. While growth will “gradually gain steam” in the next two years, the rate is going to remain below its “long-term averages,” the European Commission said this month in its latest forecast.

Consumer prices rose 0.8 percent from a year earlier in October, less than last month’s 1 percent advance and missing a 1 percent median estimate in a Bloomberg survey economists, the Warsaw-based statistics office said today. Price growth remained below the Narodowy Bank Polski’s 2.5 percent target for an 11th month.

“There is scope for further rate cuts” as real interest rates in Poland “are still among the highest” in the world, Deputy Finance Minister Janusz Cichon told TVN CNBC on Nov. 8. The ECB’s interest-rate cut is “another argument” indicating the Polish central bank “should react,” he said.

Belka argued last week that the central bank’s rate pledge should stabilize the economy and financial markets as the pace of recovery remains “moderate.” That view was shared by all 10 members of the Monetary Policy Council, he said.

Doves, Hawks

“The doves and hawks appear to have reached an agreement about the level of interest rates and they stick to it,” Jakub Taborowicz, who helps oversee the equivalent of $7.1 billion at Poland’s largest mutual fund, PZU TFI SA, said Nov. 12 by e-mail. “The recent data suggest we’re seeing a slow recovery.”

Gross domestic product rose 1.9 percent in the third quarter from a year earlier, the fastest rate since April-June 2012, beating a 1.6 percent median estimate in a Bloomberg survey of 36 economists, the statistics office said today.

Economists aren’t predicting rate cuts. Borrowing costs will rise by a total of 50 basis points next year, according to the median estimate in a Bloomberg survey of 24 analysts.

Yields on 10-year Polish government bonds fell four basis points, or 0.04 percentage point, to 4.33 percent, declining for a second day. The extra yield on its dollar debt over Treasuries rose four basis points to 152, JPMorgan Chase & Co. indexes showed. The zloty gained 0.1 percent to 4.1913 per euro at 6:04 p.m. in Warsaw. It’s up 0.7 percent this quarter, the best performance among Europe’s emerging market currencies.

Deflation Talk

Countries in the region are also struggling to maintain inflation. Hungary’s rate dropped to 0.9 percent in October, the lowest since at least 1992, even after policy makers cut the benchmark rate for 15 straight months. Slovak consumer prices rose 0.6 percent in October, the least since February 2010.

“There’s a lot of talk recently about the risk of deflation in central and eastern Europe,” Jacek Wieclawski, a cross-asset derivatives trader at Rabobank International in London, said by e-mail. “The contracts may be starting to price in a cut, which appears to be a reaction to the recent events, particularly the rate cut decision by the ECB.”

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