Polish Rate Cut a Matter of Time as Next Cabinet Seeks Doves

  • Derivatives traders bet on interest-rate reduction by April
  • Law & Justice set to pick rate-setters; wants looser policy

Markets are telling Poland’s central bank that resistance is futile.

While policy makers fighting more than a year of deflation say borrowing costs have been trimmed sufficiently, derivatives investors predict that resolve will crumble. They see a quarter-point rate cut by April as the nation’s new ruling party appoints central bankers more focused on revving up the economy.

The Law & Justice party, which won control of parliament last month having earlier taken the presidency, is following emerging nations including Hungary and Turkey in pressing monetary-policy makers to help shore up their economies. As it targets faster economic growth and lower unemployment, the party wants interest-rate reductions and those who’re ready to deliver them named to the Monetary Policy Council when it’s reshaped over the first two months of 2016.

“People are starting to factor in the change in the composition of the council, which is going to be more dovish,” said Grzegorz Maliszewski, chief economist at Bank Millennium SA in Warsaw. “The macroeconomic scenario hasn’t really changed that much to warrant that sudden change in the course of monetary policy.”

Spread Between 6-Month FRAs and Wibor
Spread Between 6-Month FRAs and Wibor

For now, easing isn’t on the cards. Policy makers will hold the benchmark at a record-low 1.5 percent at Wednesday’s rate-setting meeting, according to all 34 economists in a Bloomberg survey. Governor Marek Belka will explain the decision at the news conference at 4 p.m. in Warsaw.

Falling Prices

While consumer prices have fallen in annual terms for 16 months, Belka said in October that the present course of monetary policy has helped keep the economy on a “moderate and stable” growth path. Gross domestic product has expanded by 3 percent to 3.6 percent for the past seven quarters. While a fresh set of staff projections that policy makers receive in November will probably show a slightly lower growth and inflation in 2016, it’s unlikely to sway them in favor of cutting rates, according to BNP Paribas SA.

The bank’s stance could change in the spring as President Andrzej Duda and Law & Justice lawmakers replace eight of the MPC’s 10 members by mid-February. Duda is also set to appoint a new central bank boss in June, when Belka’s term runs out.

“The March meeting is likely to be the first one at which the new members will be able to amass and outvote the current governor,” Marcin Kujawski, a Warsaw-based economist at BNP Paribas, said in an e-mailed report. BNP predicts a half-point cut at that meeting.

Henryk Kowalczyk, a Law & Justice lawmaker and spokesman on economic issues, said last week that there’s scope to lower rates by another 25 or 50 basis points and the central bank should focus on both its inflation objective as well as economic growth.

Dual Targets?

Poland’s central bank charter states its “basic” objective is “to maintain price stability, while supporting the economic policy of the government, insofar as this does not constrain the pursuit of the basic objective.”

Any attempts to meddle with the current mandate may put Poland “outside of European Union” norms, Belka told reporters last week. He later added he saw not threat to bank’s independence.

The Law & Justice will seek central bank “cooperation” to boost lending and support investment as it targets 5 percent to 6 percent economic growth in the next four years, Zbigniew Kuzmiuk, its lawmaker in the European Parliament, told the Dziennik Gazeta Prawna newspaper last week. The plan could resemble the Bank of England’s funding-for-lending program, he said.

“Risks are skewed toward more-than-necessary easing,” said Piotr Kalisz, an economist at Citigroup Inc. in Warsaw.

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