Zloty Strengthens as Policy Makers Signal No Further Rate Cuts

Poland’s currency strengthened against the euro, paring the worst quarterly decline in 18 months, after two Monetary Policy Council members signaled the central bank wasn’t considering further interest rate cuts.

The zloty gained less than 0.1 percent to 4.1817 per euro at 1:47 p.m. in Warsaw. It has lost 2.4 percent against the European currency this year, the worst performance since the third quarter of 2011, when it weakened 11 percent.

A further decline in Poland’s inflation rate to 1 percent “won’t be a decisive factor” for rate cuts in the coming months, Monetary Policy Council member Andrzej Bratkowski said in an interview with Radio PiN yesterday. There is no room for further rate cuts, fellow member Jan Winiecki was quoted as saying yesterday by PAP newswire.

While “short-term downside risks to an already low inflation forecast will keep rate-cut expectations alive,” Agata Urbanska, a London-based economist at HSBC Holdings Plc, “marginally favours” no change to rates by the end of 2014, she wrote in a report today.

Poland’s central bank signaled this month a pause in its easing cycle after cutting interest rates by 150 basis points since November to a record 3.25 percent. Policy makers are battling to keep the European Union’s largest eastern economy from falling into its deepest slump in 12 years, with inflation at its lowest level since 2006.

Reducing the main VAT rate in 2014 to 22 percent from 23 percent, as planned by the government earlier, is “unlikely”, Prime Minister Donald Tusk said at a news conference after a cabinet meeting yesterday. This announcement “could be used as an argument against additional interest rate cuts this year,” Jaroslaw Janecki, Societe Generale SA’s chief economist in Poland, wrote in a note today.

The yield on Poland’s 10-year bonds rose one basis point, or 0.01 percentage point, to 3.87 percent.

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