Aviva Joins Morgan Stanley Rebuking Central Bank: Poland Credit

Polish interest rates look increasingly hard to predict after policy makers reduced borrowing costs last week by the most in four years a month after they signaled cuts were coming to an end.

Governor Marek Belka and his nine-member Monetary Policy Council lowered rates by 50 basis points to a record low of 3.25 percent on March 6, saying inflation and economic growth prospects had weakened. None of the 38 economists surveyed by Bloomberg forecast a reduction of more than 25 basis points after the rate panel’s rhetoric turned more hawkish since they began a cycle of cuts in November.

“We are unable to build a strategy on it because it seems most of its decisions are taken at random,” Maciej Karasinski, a fixed-income fund manager at Aviva PTE SA, which runs Poland’s second-largest pension fund with $19 billion in assets, said in an interview on March 11. “It would have been impossible to predict a 50 basis point cut.”

The spread between nine-month forward-rate agreements and the Warsaw Interbank Offered Rate, used to speculate on interest rates, widened to 26 basis points today, after falling to 16 following last week’s announcement, showing bets in the market on a quarter-point cut by the end of 2013, according to data compiled by Bloomberg. The extra yield on Poland’s two-year notes in zloty over German bunds narrowed to 327 at 5:21 p.m. in Warsaw, 25 basis points below a three-month high on March 4.

‘Unusual, Confusing’

“It is unusual and confusing for an institution that struggles to find consensus within its MPC to suddenly switch to a bigger cut in such an unexpected manner,” Pasquale Diana, an analyst at Morgan Stanley in London, said in a report on March 8. “Usually, such bold decisions take place right at the start of easing cycles, not as we approach the end.”

Przemyslaw Kuk, a spokesman for the Narodowy Bank Polski, declined to comment about the central bank’s dialogue with investors when contacted by phone yesterday.

After the February rate meeting, at which policy makers delivered a quarter-point cut, Belka said “we need to reconsider what we’ve done so far” during the rate cut cycle and that “all options” except for a rate increase are “open” at this month’s gathering.

Belka rejected the accusation that communication is faulty in an interview published yesterday by the central bank’s internet portal obserwatorfinansowy.pl, saying that Poland’s 10 monetary policy makers will “never have the same message.”

‘Restrictive’ Rates

The central bank was reacting to new information on the state of the economy, Belka said.

“The projections also showed there was room to reduce interest rates safely, which is why the council decided, in my view very correctly, on a deeper rate cut,” Belka said.

Poland’s central bank needs “one or two months” to observe the economy and afterwards “anything is possible,” including another rate cut, Monetary Policy Council member Elzbieta Chojna-Duch said yesterday in an interview on TVN CNBC. Interest rates still remain “restrictive,” she added.

“We haven’t barred the door forever to rate cuts,” Belka told reporters on the sidelines of a banking conference today in Warsaw. “Further cuts could happen if it turns out the economic growth and inflation diverge from our projections.”

Inflation Pressure

The Narodowy Bank Polski’s economic forecasts released last week projected a “sustained” inflation slowdown through 2015. The consumer price index will probably increase 1.6 percent this year, the lower end of the bank’s tolerance range of 2.5 percent plus/minus one percentage point. The economy will expand 1.3 percent this year, the worst performance since 2001 and compared with 2 percent in 2012, the forecasts showed.

The inflation rate slowed to an annual rate of 1.5 percent in February, matching the lowest rate since August 2007, according to the median estimate of 36 economists surveyed by Bloomberg. Along with publishing price data for last month tomorrow, the Central Statistical Office in Warsaw will also revise the January figure as it carries out its yearly adjustment of weights in the consumer goods basket.

Poland’s central bank was the only one in the European Union to raise interest rates last year.

The policy council’s initial reluctance to cut rates mirrors the conduct of central bankers in several other economies that coped relatively well in the 2008-2009 crisis, such as Sweden and Canada, said Lars Christensen, chief emerging markets economist at Danske Bank A/S in Copenhagen.

‘Engineered Slowdown’

“We might have this paradoxical situation where the central bank ends up cutting interest rates more than what they actually set out to do initially” because “they engineered a bigger slowdown in the Polish economy than would otherwise been the case,” Christensen said by phone on March 12.

The extra yield investors demand to hold Polish dollar-denominated bonds rather than U.S. Treasuries fell four basis points. or 0.04 percentage point, to 118 today, indexes compiled by JPMorgan Chase & Co. show. The spread of Poland’s 10-year zloty bonds over German euro-denominated bonds narrowed eight basis points to 244, 22 basis points above a four-year low hit on Feb. 1, according to data compiled by Bloomberg.

The zloty strengthened less than 0.1 percent to 4.1428 against the euro, paring is decline to 1.5 percent this year.

The cost to insure Polish debt against non-payment for five years using credit-default swaps rose one basis point to 87, data compiled by Bloomberg show. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

“The council first signaled a pause in rate reductions and then cut by 50 basis points,” Tomasz Bartnicki, who manages about 7.8 billion zloty ($2.5 billion) of debt at insurer Amplico Life and mutual fund Amplico TFI, said in an e-mailed response to Bloomberg questions on March 8. “Now they are signalling the end of the cycle, but it is hard to tell what they’ll end up doing. I’m not even trying to guess.”

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