Market Capitulates as Dove Sees `Months' Until Polish Easing

  • Traders scale back bets on easing to near the lowest this year
  • Zyzynski says `few months' needed for possible change in rates

Chalk this one up to persistence by the Polish central bank.

Traders are beating a retreat from wagers it will cut interest rates any time soon after months of expectations that the Monetary Policy Council will cave in to record deflation. Investors have scaled back bets for easing over the next six months to near the lowest this year, while the zloty on Monday had its biggest gain versus the euro in more than a week.

With the National Bank of Poland last week leaving borrowing costs unchanged for a 13th month, Jerzy Zyzynski, the most vocal proponent of easing among new policy makers, said in an interview that “a few months” are needed before the conditions to cut rates can fall into place. Eryk Lon, the only other central banker to indicate he’d consider lower rates, has made his backing for a decrease contingent on a slowdown among Poland’s main trading partners and the risk of “persistent deflation.”

“Persistently low inflation -- core inflation in particular -- obviously shows how big the room to cut rates really is,” MBank SA economists including Ernest Pytlarczyk said by e-mail. “That this has not happened yet is a result of exchange-rate volatility and the current MPC’s communication strategy -- the MPC wants to assert itself as an independent body first, which implies waiting with rate cuts.”

FRAs, Bonds

Six-month forward-rate agreements, derivatives used to speculate on borrowing costs, traded 13 basis points below the Warsaw Interbank Offered Rate on Tuesday, compared with this year’s high of 38 basis points in January. The yield on Poland’s 10-year government bond added three basis points to 2.93 percent. The zloty was 0.3 percent weaker at 4.2892 versus the euro after jumping 0.5 percent on Monday.

The central bank needs to maintain its wait-and-see stance and be “more mindful” of developments in the labor market that could increase inflation pressures over the next three to four quarters, according to another policy maker, Jerzy Osiatynski.

“Keeping Polish interest rates unchanged would be the safest course of action in the near term,” Osiatynski said in an interview with news service PAP published on Tuesday.

‘In Transition’

While all but two members of the 10-person rate-setting board have already been replaced, monetary policy will remain “in transition” until Governor Marek Belka’s term ends in June, Zyzynski, 66, said after attending his first board meeting last week. Also giving him pause is the economic impact of a new program of family benefits and changes in bank-tax regulations, which the policy council will be able to assess in the next inflation projection due in July.

“In a few months, a new governor will take over and the council will be faced with all those new economic factors,“ Zyzynski said. “I still think a cut is desirable. I don’t think that passing a motion for a cut would be possible or would serve a purpose in the nearest months.”

By postponing possible rate cuts beyond Belka’s term, Zyzynski is forcing traders and many analysts to question the outlook for easing. After he became the last of the new members to join the policy council, Goldman Sachs Group Inc. economists said Zyzynski “has expressed more dovish views than the rest of the new members, so his arrival may strengthen the dovish side of the MPC.”

Record Deflation

With borrowing costs on hold since March 2015, Poland’s annual deflation unexpectedly deepened to 0.9 percent in March and the central bank now predicts price declines will continue in the longest run since the mid-1950s. 

“The low inflationary environment, contrasted by indicators of strong growth, continue to create a challenging monetary policy environment for the central bank,” Goldman Sachs economists including Magdalena Polan said in a report.

Gross domestic product expanded faster than 3 percent in 2014 and 2015, and the central bank now forecasts the economy will add 3.8 percent this year and next.

‘Lower Probability’

“We do see the rising risk to the cut outlook as economic expansion actually might have been better than we thought earlier,” said Jakub Olipra, an economist at Credit Agricole Bank Polska in Warsaw, who predicts a 50 basis-point cut in July. “What’s more, recent comments by Belka and other MPC members signal a lower probability of interest-rate cuts in the coming months.”

All eight new rate setters were appointed either by the ruling Law & Justice party or its ally, President Andrzej Duda. The president will also name a replacement for Belka, who said last month that his “probable” successor Adam Glapinski is likely to stick with the same policies.

Belka, who has two rate meetings left as the MPC’s chairman, “has a strong personality and seems to support steady rates,” Zyzynski said. Despite the changes on the policy board, the council has adopted a “unanimous stance, showing a clear intention to keep rates on hold.”

The MPC “over time will become more differentiated,” and it will probably opt for “a slow-hiking cycle” from July 2017 instead of cutting rates now or keeping them unchanged for the whole of next year, said Peter Attard Montalto, an economist at Nomura Plc in London.

“Unorthodox policies will not occur until a new president of the NBP arrives mid-year and only then probably not until after extensive research –- putting us into year-end,” Montalto said.

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