Poland Cuts Main Rate for Third Month to Spur Fading EconomyDorota Bartyzel
Poland’s central bank indicated it may pause its monetary-easing cycle after cutting borrowing costs for a third month to spur economic growth that’s forecast to dip to the slowest in more than a decade in 2013.
The Narodowy Bank Polski lowered the benchmark seven-day reference rate a quarter-point to 4 percent today, meeting the forecasts of all 33 economists surveyed by Bloomberg. While Governor Marek Belka didn’t rule out another reduction in February, he said the cuts may soon stop.
“A certain round of interest-rate cuts is drawing to an end -- you can’t go on in the same policy mode forever,” Belka told a news conference in Warsaw. “In recent months our statements were promising rate cuts and this time our language is milder. That means a rate cut is possible and even probable, but it’s not unconditional or practically certain.”
Monetary-policy makers have trimmed borrowing costs by 75 basis points since November as the economy struggles amid the debt crisis in the euro area, which buys more than half of Polish exports. Gross domestic product in the European Union’s biggest eastern economy will expand 1.5 percent this year, the least since 2002, according to the central bank.
The zloty, last year’s best-performing emerging-market currency with a 9.3 percent gain against the euro, rose to 4.1069 per euro after the decision. Following Belka’s remarks, the currency extended its advance to 4.0826, or 0.7 percent stronger on the day, at 5:25 p.m. in Warsaw. The yield on the government’s two-year bond jumped 10 basis points, or 0.1 percent, to 3.22 percent.
The central bank’s rate-setting Monetary Policy Council altered the wording of its monthly statement from December, saying it “rule out” a rate cut rather than pledging to ease policy further.
“The Council doesn’t rule out further monetary-policy easing should the incoming data confirm a protracted economic slowdown and should the risk of increase in inflationary pressure remain limited,” it said.
Poland was the only EU nation to raise interest rates in 2012 as policy makers focused on elevated inflation. It began easing in November, a year after the European Central Bank, five months after the Czech Republic and three months after Hungary. Romania held borrowing costs unchanged at a record-low 5.25 percent Jan. 7 as the central bank year weighs inflation pressures against a slowdown in GDP growth.
Polish attention has switched to economic expansion, which eased to 1.4 percent from a year earlier in the third quarter, the slowest pace since 2009, as consumer-spending growth decelerated to the worst in nine years, new jobs dried up and inflation outpaced wage increases.
GDP probably rose by 2.2 percent to 2.3 percent last year, compared with 4.3 percent in 2011, according to official forecasts. Quarterly growth in the October-December period may have been less than the 0.4 percent recorded in the previous three months, Ludwik Kotecki, chief economist at the Finance Ministry, said Dec. 31 in an interview.
“I’d say a 25 basis point cut isn’t enough and they’re too conservative and probably don’t get how bad things are,” Dmitri Barinov, who helps manage the equivalent of $2.6 billion in emerging European debt at Union Investment Privatfonds in Frankfurt, said in an e-mailed response to questions. “In the long run, I don’t exclude that they’ll be forced to cut even below 3%.”
As the economy has lost steam, inflation, which triggered last May’s rate increase after exceeding the central bank’s 2.5 percent goal for two years, slowed to a two-year low of 2.8 percent in November. It may have met the regulator’s target in December for the first time since September 2010 as domestic demand and fuel prices eased, according to a forecast by Jaroslaw Janecki, a Warsaw-based economist at Societe Generale.
Derivatives traders predict 76 basis points of interest-rate cuts this year, based on the spread between 12-month forward-rate agreements and the Warsaw Interbank Offered Rate. Three-month FRAs point to 52 basis points, or 0.52 percentage point, of reductions through March, data compiled by Bloomberg show.
“Dropping by quarter-point increments is their way of staying in control, but they’ll have to keep going,” Ernest Pytlarczyk, head of financial-markets research at BRE Bank in Warsaw, said by phone. “We see a contraction and inflation well below target in the first quarter, so market expectations of the main rate at 3 percent this year won’t be disappointed.”
Belka said today that the central bank isn’t changing its policy stance, which remains tilted toward easing. “That could potentially happen in the early months of this year,” he said.
Another rate cut is possible in February “but in that case you’d have to expect that in the following months there’s going to be a pause,” Belka said. “We’ll use that time to analyze the situation and our next projection” for inflation and economic growth, which the Monetary Policy Council will receive in February.