Draghi QE Prospects Fail Test for Belka Rate Cuts: Poland Credit

Poland Central Bank Governor Marek Belka
Poland Central Bank Governor Marek Belka said yesterday, Poland is experiencing “a clear, vigorous economic recovery” accompanied by “low” inflation which would help “stimulate consumption.” Photographer: Piotr Malecki/Bloomberg

Poland central bank Governor Marek Belka is ruling out deeper interest-rate cuts even as policy makers in the neighboring euro region weigh quantitative easing to ward off deflation.

Poland’s 10-year bonds rallied since April 3, when European Central Bank President Mario Draghi buoyed investors by saying policy makers backed QE, or large-scale purchases of assets, if needed to bolster prices. The yield on the notes dropped six basis points to 4.02 percent at 10:21 a.m. in Warsaw, the lowest since July. The spread over equivalent German bunds narrowed to a three-month low of 248 basis points.

While Belka said a decision by the ECB to start asset purchases would “change the environment” for Polish policy making, it would largely be offset by the removal of monetary stimulus by the U.S. Federal Reserve. He also repeated the central bank’s pledge to keep borrowing costs at a record low until at least Sept. 30 and signaled the policy may be extended after new inflation and growth projections in July.

“Much of the expectations regarding cuts have been driven by market participants over-thinking the connection with the ECB signals to loosen further,” Peter Attard-Montalto, an emerging-market economist at Nomura International Plc, said by e-mail yesterday. For Poland to cut there would need to be a meaningful downgrade of both growth and inflation forecasts and these “seem unlikely,” he said.

‘Mortal Sin’

Almost two-thirds of respondents in the Bloomberg Monthly Survey of 40 economists predicted the ECB will ease policy by June. Of those, just under half said Draghi may implement multiple measures ranging from interest-rate cuts to asset purchases and long-term loans.

The pace of expansion in the European Union’s largest eastern economy will more than double this year to 3.6 percent from 1.6 percent in 2013, the central bank’s latest projection showed. At the same time, inflation won’t climb to the bank’s 2.5 percent goal until 2016, according to the March forecasts.

Poland is experiencing “a clear, vigorous economic recovery” accompanied by “low” inflation which would help “stimulate consumption,” Belka said yesterday. Cutting rates in this environment would be “pro-cyclical” and a “mortal sin” of monetary-policy making, he told reporters in Warsaw.

QE Questions

While the recovery is becoming evident in the labor market, still elevated unemployment is helping curb wage growth, policy makers said in a statement after yesterday’s decision. They’ve kept the main rate unchanged at 2.5 percent since July, after reducing it by 225 basis points in the preceding eight months.

ECB officials including Governing Council member Ewald Nowotny have signaled any purchases may center on asset-backed securities, a market Draghi once described as “dead.” Total issuance of securitized assets in Europe was 250.9 billion euros ($347.5 billion) in 2012, compared with the equivalent of 1.55 trillion euros in the U.S., according to data compiled by the Association for Financial Markets in Europe.

Instead, the ECB may buy bonds under a program similar to its Outright Monetary Transactions plan announced in 2012 to shore up government bond markets and “de facto never used,” according to Radoslaw Cholewinski, who helps oversee 16.1 billion zloty ($5.4 billion) at Pioneer Pekao Investment Management in Warsaw.

“If it turns out this way, it won’t support the Polish bond market or affect Polish monetary policy,” he said by e-mail yesterday.

Tightening Delay

Belka said quantitative easing by the ECB would bolster the zloty, which in turn would help “moderate” price growth. Inflation undershot the central bank’s target for a 15th month in February, as prices rose 0.7 percent from a year earlier.

The zloty eased 0.1 percent to 4.1676 per euro today. It has weakened 0.3 percent so far in 2014 following a 1.7 percent decline last year. The extra yield on Poland’s dollar bonds over Treasuries was unchanged from yesterday at 107 basis points, according to indexes compiled by JPMorgan Chase & Co.

“The zloty would strengthen a great deal against the euro and this would kill exporters,” Marcin Karasiewicz, a fixed-income trader at PKO Bank Polski SA said by e-mail yesterday. In this scenario, Poland’s policy markers “would have to do something” with rates, he said.

Belka said last week that most policy makers on the 10-member rate council are in a “dovish mood” with “more and more voices” in favor of keeping rates on hold until 2015.

“I’ve been on the dovish side of Polish policy for a long time in calling for no hikes until the first quarter of 2015,” Abbas Ameli-Renani, an emerging-market strategist at Royal Bank of Scotland Group Plc in London, said by e-mail yesterday. “With ECB QE coming into play, that initial rate hike can be pushed even further back into the future and will likely become a second-half of 2015 story.”

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