New Polish Central Banker Looks Abroad for Rate Cut Signal

  • Easing will hinge on `external factors,' rate setter Lon says
  • Poland has held its benchmark for a year amid record deflation

The clearest guide for the future of Polish monetary policy may lie outside its borders, according to central banker Eryk Lon.

Lon, 45, who attended his first policy meeting last week, said signs of a slowdown among Poland’s main trading partners, or any threat to domestic economic prospects, would amount to a “key argument” in favor of monetary easing. The euro region, led by Germany, buys more than half of Polish exports.

“A rate cut or a pause are a more probable scenario than monetary tightening this year,” he said in an e-mailed response to questions Tuesday.

While the European Union’s biggest eastern economy has so far bucked the lackluster performance of its bigger neighbors, global risks loom larger for a new class of central bankers who are taking charge in Warsaw this year. The National Bank of Poland kicked off a debate last week on how to transition from its year-long pause in monetary policy after its counterparts in the euro region delivered rate cuts, more bond purchases and a potential subsidy to lenders in a renewed attack against the threat of deflation.

In a reflection of weaker international prospects, the European Central Bank reduced its economic growth outlook to an increase of 1.4 percent this year, lower than a previous forecast of 1.7 percent. For 2017, it predicted an expansion of 1.7 percent. Euro-area consumer spending growth slowed to 0.2 percent in the fourth quarter from 0.5 percent in the third, limiting economic gains to just 0.3 percent.

‘Key Argument’

“Personally, a key argument that would encourage me to support a rate cut would be any real prospect of an economic slowdown among our main trading partners in the coming quarters,” Lon said. If those forward indicators were to signal a threat to Poland’s economic expansion, “only that would be enough to increase my inclination to support a rate cut.”

Six-month forward-rate agreements, or derivatives forecasting the level of future interest rates, were 19 basis points below the Warsaw Interbank Offered Rate at 6:03 p.m. in Warsaw, indicating traders are expecting less than a quarter-point cut, according to data compiled by Bloomberg. The zloty is the third-best performer against the euro in the past month among its peers in developing Europe with a 2.6 percent gain.

Policy Reboot?

While most newcomers to Poland’s Monetary Policy Council have so far spoken against cuts, Lon is hewing less closely to the line pursued by his predecessors.

All eight new policy makers on the 10-member panel were appointed either by the ruling Law & Justice party, or by its ally, President Andrzej Duda. The party, which swept to power in 2015 with wins in presidential and parliamentary elections, vowed before the nomination process to pick central bankers who’ll favor more monetary easing to spur growth.

Lon, nominated to the policy board by the lower house of parliament, was previously an economics professor in Poznan, western Poland. Seven years ago, he authored a report that argued against Poland’s accession to the euro.

“The need to care about the balanced nature of our economic growth was a very important conclusion after the last rate meeting,” Lon said. “In light of the ECB’s expansionary policy, the standard policy of the Polish central bank appears to be its strength, and it’s possible because of our well-balanced economic growth.”

Easing Cycle

Under Governor Marek Belka, whose term ends in June, the central bank reduced its benchmark by 325 basis points over almost three years to a record-low 1.5 percent, marking the longest monetary easing cycle in Poland’s modern history. That’s helped boost the pace of expansion in gross domestic product from 1.6 percent in 2012 to 3.6 percent last year.

“It’s worth making this growth even more dynamic,” Lon said, adding that he’s hopeful that the government’s $254 billion investment plan will offer such a boost.

To gauge the scope for monetary easing, Lon is looking to inflationary pressure, which he said will stay “at a relatively low level.”

Inflation Outlook

Deflation moderated to 0.8 percent from a year earlier last month after a 0.9 percent drop in prices in January. The index will stay negative at least through the third quarter and close the year at an average of minus 0.4 percent, according to the central bank’s latest projection from this week. Its previous forecast four months ago saw inflation at 1.1 percent in 2016.

“The lack of reaction by the MPC to prolonged deflation readings result from favorable economic prospects,” Piotr Dmitrowski, an economist at Bank Gospodarstwa Krajowego, said in an e-mailed note. “As long as these prospects are reflected in monthly data, and this is what we’re expecting, weak prices won’t sidetrack investors from expecting an extended period of stabilized interest rates.”

Poland’s record deflation has done little to dent its economic growth. The central bank’s latest outlook included an upward revision of this year’s GDP gain to 3.8 percent from 3.3 percent.

Balanced economic growth will allow consumer prices to return to policy makers’ goal of 2.5 percent “gradually,” according to Grazyna Ancyparowicz, another new member of the rate-setting board. Monetary policy now has a limited impact on GDP, with fiscal and structural changes holding bigger sway, she said by e-mail on Wednesday.

“Maintaining the current level of interest rates preserves the space for monetary easing in the event of shocks,” Ancyparowicz said.

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