Poland Rejects Rate Cut Bets After Central Bank Holds Benchmark

  • Governor Belka says rate policy contributed to stable growth
  • Real interest rates to ease as deflation will end in November

Poland’s central bank kept its benchmark interest rate unchanged at a record low, with Governor Marek Belka dismissing market expectations of another cut even as he said inflation may take longer-than-forecast to return to target.

Policy makers, who left the reference rate at 1.5 percent for a sixth meeting on Tuesday, said that declining commodity prices, slowing emerging-market economies and a deteriorating global price outlook may prevent inflation from reaching their 1.5 percent to 3.5 percent target range. At the same time, real interest rates will start to decline because deflation will most likely end in November, Belka said.

The record-low borrowing costs have failed to spur consumer prices, and deflation deepened in September, extending the bout of negative prices to 15 months. Other economic indicators, including retail sales and manufacturing data, have signaled that the European Union’s largest eastern economy will grow at the same pace from the first half of this year. That has spurred derivative traders to start betting on more policy easing in the first half of 2016, when eight of the 10 rate-setting panel members will be replaced.

“I can’t tell how the situation will develop, or what the new policy council will look like, but I doubt that monetary policy will have to be modified in any significant way,” Belka said at a news conference after the meeting. “Monetary policy had a significant contribution to keeping the economy on a moderate and stable growth path and it should stay this way.”

Tuesday’s decision matched the predictions of all 36 economists surveyed by Bloomberg and left markets unfazed. The zloty traded unchanged at 4.2445 to the euro at 5:24 p.m. in Warsaw. The Polish currency slipped to a one-month low of 4.2577 on Oct. 1. The yield on Poland’s 10-year local-currency bond rose five basis points to 2.63 percent on Tuesday.

Deflation Debate

Six-month forward-rate agreements show a higher probability of the central bank cutting than raising borrowing costs through April, trading 22 basis points below the Warsaw Interbank Offered Rate on Tuesday. They traded above the rate from May till July.

A decline in consumer prices deepened in September to 0.8 percent from a year earlier, according to a flash estimate by the Central Statistical Office. In reaction, rate setter Elzbieta Chojna-Duch said Sept. 30 that consumer prices may decline until early next year. In her opinion, deflation driven by oil and gas prices is “positive for the economy” and creates no grounds for any rate moves.

According to the central bank’s forecast, the consumer-price index should return to positive readings next month, heading toward the lower end of the central bank’s target range of 1.5 percent to 3.5 percent next year. It has been below the 2.5 percent target for almost three years.

“On the one hand we have persistent deflation preventing any rate increase, and on the other, the Council wouldn’t be inclined to even consider any rate cut with the economic expansion noticeably above 3 percent,” Jaroslaw Janecki, chief economist at Societe Generale SA in Warsaw, said on Monday. “It’s almost certain that rates will stay unchanged.”

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