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Poland Drops Rate Pledge as Tapes Row Overshadow Policy

Poland's Central Bank Governor Marek Belka
Poland’s central bank Governor Marek Belka said the probability of a rate cut in September is “very low.” Photographer: Piotr Malecki/Bloomberg

July 2 (Bloomberg) -- Poland’s central bank, reviewing interest rates for the first time since a scandal over leaked recordings last month, dropped its commitment to keep borrowing costs at a record low until at least the end of September.

While retracting the pledge extended by three months in March, Governor Marek Belka said the probability of a rate cut at the next meeting in September was “very low” after the the benchmark was kept at 2.5 percent today. Policy makers said they’ll try to determine how incoming data affect the outlook for economic growth and inflation in the medium term.

“In the coming months you could expect all possible steps, which will depend on how we assess the evolution of the economic situation,” Governor Marek Belka told reporters in Warsaw. “The balance of risks has changed.”

As Poland tries to move past the eavesdropping scandal, policy makers are grappling with a growing risk of deflation and signs that the economy may be losing steam after its fastest expansion in two years in the first quarter. Inflation will stay “very low” and temporarily drop below zero in the coming months, the 10-person Monetary Policy Council said in a statement.

The monetary authority convened today for the first rate meeting since the scandal erupted June 14, when the Wprost magazine revealed a tape of Belka making crude comments about fellow rate setter Jerzy Hausner and discussing possible central bank help for the government before next year’s elections. The central bank is by law required to stay out of politics.

‘Temporary’ Damage

“One definitely can’t talk about any institutional crisis in the case of the central bank.” Elzbieta Chojna-Duch, one of the policy makers, said at the press conference with Belka. “Any damage done by the scandal to the bank’s reputation is temporary.”

Investors pared their wagers for a September rate cut after Belka said Poland was less vulnerable to deflation, saying his outlook for the economy remained “relatively optimistic.”

Three-month forward-rate agreements traded 20 basis points below the Warsaw Interbank Offered Rate at 6:30 p.m. in Warsaw, down from 27 basis points yesterday, data compiled by Bloomberg show. The zloty strengthened 0.3 percent to 4.1478, while the yield on the government’s two-year bond rose four basis point to 2.53 percent after setting a record low during the day.

Rebuilding Reputation

Belka said Hausner “didn’t signal” he was planning to step down from the council following the scandal. The governor said he’s working to rebuild the credibility with the panel and “the only way I can do that is through normal work.”

Hausner and Adam Glapinski, another policy maker, didn’t attend the first working meeting after the scandal broke last month. Those who were present praised working with Belka in a June 17 statement, although Andrzej Rzonca, another central banker, later said that didn’t constitute support for the governor and called on him to consider stepping down.

Belka, a former premier and finance minister, said in a June 24 interview that the central bank shouldn’t be expected to “become more hawkish in reaction to the crisis” because “that would be putting perceptions of how independent and credible we are ahead of what we think is the proper course of monetary policy.”

While growth in the European Union’s largest eastern economy accelerated to 3.4 percent in the first quarter, the fastest in two years, the pace of expansion may have slowed in the April-June period, Finance Minister Mateusz Szczurek told reporters in Warsaw last week.

Today’s decision to hold the key rate matched the forecasts of all 31 economists surveyed by Bloomberg

18 Months

Inflation has stayed below the central bank’s 2.5 percent target for 18 months and a new staff projection that policy makers received today showed it will remain subdued.

The bank cut its inflation forecast through 2016 and said there was a 50 percent probability that it will average 0.1 percent to 0.4 percent this year. At the same time, it predicts growth at 3.2 percent to 4.1 percent, compared with the 2.9 percent to 4.2 percent range seen in March.

Next year, price growth is set accelerate to between 0.5 percent and 2.1 percent. The full forecast will be published July 7 at 10 Warsaw.

“We remain of the view that downside surprises on activity and inflation will likely push the central bank to cut rates,” Nora Szentivanyi, an economist at JPMorgan Chase & Co. in London, said in an e-mailed comment. “Yet risks to our 50 basis-point rate cut call for September are tilted toward a smaller or delayed cut.”

To contact the reporters on this story: Dorota Bartyzel in Warsaw at; Piotr Skolimowski in Warsaw at

To contact the editors responsible for this story: Balazs Penz at Paul Abelsky

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