Next Batch of Polish Rate Setters Cast Doubt on Quick Loosening

  • Traders pare bets for Polish interest-rate reductions in 2016
  • Rate panel hopefuls don't see cuts bringing big economy boost

Derivative traders are paring expectations for Polish interest-rate cuts as candidates for the next Monetary Policy Council reject quick, wide-scale monetary loosening.

Forward-rate agreements showed bets for less than a quarter-point of monetary easing in the next 12 months last week, down from a nine-month high of 40 basis points on Nov. 26. Expectations for more reductions increased in October after Henryk Kowalczyk, an economic aide to Prime Minister Beata Szydlo, said Law & Justice would favor candidates with a dovish stance to replace current members of the central bank’s policy panel, whose terms end early next year.

Zloty 12x15 FRAs vs WIBOR 3M
Zloty 12x15 FRAs vs WIBOR 3M

More monetary easing won’t necessarily spur the nation’s $550 billion economy, according to both Jerzy Zyzynski and Grazyna Ancyparowicz, who confirmed that they’ve been asked by Law & Justice to join the next rate council. Plans to change the central bank charter to boost its role in the economy are “not on the table” as fresh data showed industrial output expanding at the highest pace in eight months in November, Finance Minister Pawel Szalamacha said in an interview last week.

“Some time has passed from the aggressive statements from Kowalczyk and people started to think that the new policy makers will want to build a position for themselves the next six years and that they won’t be that easy to steer,” Arkadiusz Urbanski, a fixed-income strategist at Bank Pekao SA said on Thursday. “Since the latest data is really good and the economy’s growing, it may turn out that we won’t have that cut at all.”

Spending Pledge

Eight members of the central bank’s 10-member rate council will be replaced by parliament and the president in January and February, while Governor Marek Belka’s term ends in June. All of them will be nominated by Law & Justice, which controls both houses of parliament, and the party’s ally, President Andrzej Duda. The governing party, which won power on promises to boost spending and levy taxes on financial institutions, proposed Ancyparowicz as well as Eryk Lon, Marek Chrzanowski, Eugeniusz Gatnar and Jerzy Kropiwnicki as parliamentary candidates for rate-setting panel.

“The cost of money alone isn’t enough to stimulate investments,” Ancyparowicz, a professor at the Katowice School of Economics, said in an interview in Warsaw on Dec. 12. Lower borrowing costs would harm profitability at commercial banks, which need to operate in “stable conditions” to retain the trust of the public, she said. Even a 25 basis-point reduction “wouldn’t have any impact” on economic growth, Zyzynski, a Law & Justice lawmaker, said on Dec. 9, according to the PAP news service.

While the new rate council may be “more dovish than the previous one,” the recent comments from its potential members “are rather cautious,” according to Rafal Benecki, the chief economist at ING Bank Slaski SA, a unit of ING Groep NV. ING last week scaled down its rate-cut expectations for next year to 25 basis points from 50 basis points.

Forward-rate agreements traded 24 basis points below the Warsaw Interbank Offered Rate on Tuesday, indicating scope for less than a quarter-point of easing next year. The zloty rose 0.3 percent to 4.2401 per euro on Tuesday, extending the best weekly gains since January.

Poland kept its key interest rate at a record low 1.5 percent for an eighth meeting this month. The outgoing council members last lowered their benchmark in March, when they announced the end to a three-year easing cycle, arguing that deflation posed no threat to economic growth.

The European Union’s largest eastern economy is expected to grow 3.5 percent this year and next, according to forecasts compiled by Bloomberg. Industrial output and retail sales growth beat expectations in November, rising 7.8 percent and 3.3 percent, respectively, statistics office data showed last week.

“The probability of rate cuts is decreasing,” Piotr Kalisz, chief economist at Citigroup Inc.’s Polish unit, said in a note on Thursday. “Interest rate cuts are not necessary, though they are likely in the first half of 2016.”

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