Polish Central Bank Unfazed by Zloty Gains as Rates Held

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Poland’s central bank left its benchmark interest rate at a record low and shrugged off risks to the economy from an appreciating zloty.

A rate reduction in March, coupled with a recovery of the euro-area economy and improving conditions in the labor market, limit downside risks to meeting the 2.5 percent inflation target in the medium term, policy makers said in a statement. They left the seven-day reference rate at 1.5 percent, matching the predictions of all 35 economists in a Bloomberg survey.

The central bank declared its easing cycle over last month after Poland’s longest stretch of deflation in at least three decades prompted it to cut borrowing costs by 50 basis points in March. That pledge remains in force and the recent zloty advance wasn’t a surprise, Governor Marek Belka said on Wednesday.

“We have a free-floating currency, so its rise and fall are natural,” Belka told reporters at a news conference after the decision in Warsaw. It would be “unnatural and not serious” to go back to cutting interest rates, he said.

The rate decision coincided with the release of March consumer-price index, which showed annual deflation eased to minus 1.5 percent from minus 1.6 percent in February. The data showed deflation that started in July was “quite slowly bottoming out,” according to Belka.

The zloty has strengthened 3.8 percent against the euro since last month’s rate cut, extending its appreciation this year to 6.8 percent. The currency strengthened beyond 4 versus the euro for the first time in four years on Tuesday, touching 3.9972 before retreating to 4.0198 at 2:30 p.m. Wednesday.

ECB Fallout

The need to stabilize the local currency and bond markets before the European Central Bank embarked on its 1.1 trillion-euro ($1.2 billion) bond-buying program was a major reason for the March rate cut, according to policy maker Jerzy Osiatynski. The half-point reduction was intended to forestall “the risk of excessive zloty appreciation in reaction to quantitative easing,” Osiatynski said in an interview on March 12.

While policy makers have worried “for many years” that the zloty will surge in reaction to the economy’s resilience, Belka said on Wednesday that strong appreciation hasn’t happened.

Growth in the European Union’s largest eastern economy will quicken to 3.4 percent this year from 3.3 percent in 2014, according to central bank forecasts released last month. The staff projection shows inflation accelerating to 1.2 percent in 2017 from this year’s forecast of minus 0.5 percent. Deflation may end even sooner than the central bank predicts, Deputy Finance Minister Artur Radziwill said on April 13.

“The stronger zloty is not surprising, given QE in the eurozone, but Belka is both old enough and wise enough not to make comments about the exchange rate,” Nigel Rendell, an analyst at Medley Global Advisors LLC, said by e-mail. “So he kept relatively quiet.”

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