Poland Cuts Main Rate for Fourth Month as Economy Slows

Poland’s central bank cut its main interest rate for a fourth month to avert the biggest economic slowdown in more than a decade after consumer spending plunged amid Europe’s debt crisis.

The Narodowy Bank Polski lowered the benchmark seven-day reference rate a quarter-point to 3.75 percent, matching all 34 forecasts in a Bloomberg survey. At the same time, the bank dropped language from its post-meeting statement that further cuts can’t be ruled out. Governor Marek Belka later clarified that doesn’t mean the bank has abandoned its easing bias.

“Before we make another move, we need to take stock of what we’ve done so far, what signals are coming from the economy, what the projection will tell us,” Belka said at a news conference in Warsaw after today’s decision. “It doesn’t mean that we’re suggesting there won’t be a cut in March; it means that all options are open.”

Policy makers have reduced borrowing costs by 1 percentage point since November as growth in the European Union’s biggest eastern economy slowed to 2 percent last year, less than half the pace in 2011. Individual consumption, which makes up 62 percent of gross domestic product, added 0.5 percent to GDP in 2012, the least since comparable data were introduced almost two decades ago.

The zloty, which has weakened 2 percent to the euro since the start of the year, strengthened 0.2 percent to 4.1668 at 4:23 p.m. in Warsaw. The government’s 10-year bond yield was 3.969 percent, up four basis points from yesterday.

Bucking Trend

Poland was the only EU nation to raise interest rates in 2012 as policy makers focused on elevated inflation. It began cutting rates 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 yesterday, while Serbia unexpectedly raised borrowing costs for a second time this year amid surging price growth.

Belka said after the last rate meeting on Jan. 9 that a “certain round” of monetary-policy easing may be ending, even as the central bank predicts 1.5 percent growth this year, the weakest since 2002. The governor modified that position today, telling reporters he’d prefer to wait until after the March rate meeting, when more data and the bank’s new inflation and growth projections are available, before saying whether easing is nearing an end.

Another Cut

The economy “won’t improve in coming months,” Piotr Lysienia, an economist at Bank Pocztowy in Warsaw, said in an e-mailed comment after the announcement. “We’re expecting one more rate cut to 3.5 percent and then the Council will end the easing cycle.”

In December, retail sales dropped the most since 2005 and the jobless rate rose to 13.4 percent, the highest in almost a year, after exports increased 4.1 percent in the 11 months through November compared with 13.3 percent a year earlier. Exports to the crisis-hit euro area were 52 percent of total foreign sales compared with 54.3 percent a year earlier.

Fiat SpA, Italy’s biggest manufacturer, announced on Dec. 7 it will dismiss 1,500 Polish workers as Europe’s car market heads toward a 17-year low. Tauron SA, Poland’s second-biggest utility, said last month it will seek to trim 3,180 jobs by 2015. TPSA, the largest telecommunications company in Poland, plans to cut 760 jobs, according to a Jan. 15 report on website Telepolis.pl.

Weak consumer demand, “the main disappointment” in last month’s GDP report, may force policy makers to abandon plans to suspend rate cuts, according to Piotr Kalisz, an economist at Citigroup in Warsaw.

Inflation had exceeded the central bank’s 2.5 percent target for more than two years until December, when it slowed to 2.4 percent, the lowest since August 2010. Even with further rate cuts, there won’t be “any inflationary impulses” this year, MPC member Andrzej Bratkowski said in a Jan. 21 interview.

Further Easing

Should the economy’s performance in the first quarter this year prove “as bad as December,” when industrial production plunged the most in almost four years, the benchmark rate may need to be cut to 2 percent, Bratkowski said, adding that he doesn’t expect such a scenario.

Following today’s reduction, derivatives traders predict two quarter-point reductions to the main rate by July, based on the spread between six-month forward-rate agreements and the Warsaw Interbank Offered Rate, according to data compiled by Bloomberg.

Belka told Parliament on Jan. 30 that monetary easing will continue. His comments came after Finance Minister Jacek Rostowski said policy makers had made “mistakes” and been “too late” to start cutting rates.

The central bank may “stick to its signal for a pause in March,” Caroline Grady, an economist at Deutsche Bank in London, said in a Jan. 29 report. “But the risks are increasingly skewed toward a deeper easing cycle than the additional 75 basis points we have in our forecast.”