Poland Leaves Rates at Record Low on Recovery Expectation

Poland’s central bank kept interest rates unchanged for the first time in five months as policy makers expect record-low borrowing costs will reinvigorate the European Union’s largest eastern economy.

The Narodowy Bank Polski in Warsaw left the benchmark seven-day reference rate at 3.25 percent today after reducing them by 150 basis points since November. The decision matched the estimates of all 35 economists surveyed by Bloomberg.

Rate setters are still open to further monetary easing as they try to gauge whether a recovery has begun, Governor Marek Belka said at a briefing after today’s decision. While the central bank projects a “gradual” recovery, the recent reports showed contraction in manufacturing deepened last month, retail sales fell in February and unemployment rose to a six-year high.

““We never barred the door to further cuts, but nobody expected one today and our statement isn’t promising one next month,” Belka said at the news conference. “I won’t say how much time we’re giving ourselves.”

The 10-year bond yields extended their decline after his comments, falling 7 basis points on the day to 3.53 percent. The zloty advanced 0.3 percent to 4.1005 per euro at 5:47 p.m. in Warsaw.

Derivatives traders are betting on another quarter-point reduction through June, according to the difference between two-month forward-rate agreements and the Warsaw interbank offered rate.

Recovery Doubt

The recovery scenario is in doubt after European Central Bank President Mario Draghi said on April 4 that risks to the outlook remain on the downside for the euro region, Poland’s biggest trading partner. Policy makers may cut rates “in several months” unless the economy starts to recover, policy maker Andrzej Bratkowski told Radio PiN on March 26.

“The tone of the statement and the press conference leaves the door open for further easing,” Rafal Benecki, chief economist for Poland at ING Groep NV in Warsaw, said in e-mailed comment today. “It seems the MPC is anticipating that inflation can surprise on the downside in coming months but wants to know how sustainable this can be.”

While Polish monetary-policy makers are hoping for a rebound, the Hungarian central bank last week announced steps to spur lending and tap currency reserves in a bid to end the country’s second recession in four years. Bank Rossii must use its own tools to help economic growth, Elvira Nabiullina, President Vladimir Putin’s central bank chief nominee, told lawmakers in Moscow yesterday.

‘Painful Consequences’

Domestic borrowing costs are nearing a level where “monetary policy stops being conventional,” Belka told reporters today. That makes any decision to cut rates further is “difficult,” he said.

‘Some euro-area countries whose economies are similar to Poland’s have suffered painful consequences from interest rates that were set too low,” Belka said

Belka and his fellow rate-setters were so confident that the economy would weather the euro region’s debt crisis that they unexpectedly raised borrowing costs in May 2012 to curb an increase in consumer prices. Nine months later, the rate of inflation fell to 1.3 percent, below the central bank’s tolerance range of 1.5 percent to 3.5 percent.

No Deflation

Policy makers saw “no risk of deflation” and they may consider steps if there was “high” probability of inflation staying below the central bank’s target “in the long term,” Belka said today.

While Poland became the only EU economy to defy recession since 2008 debt crisis, the going has gotten tougher. Four years ago it relied on tax cuts that boosted consumer spending and widened the budget deficit. Now, the government has pledged to narrow the gap and fiscal cuts were “the most important factor” behind the slowdown, Belka said last week.

The central bank’s March staff projection, which showed inflation will stay close to 1.5 percent through 2015, was the main reason policy makers unexpectedly cut borrowing costs by 50 basis points last month, he said. The outlook assumed the pace of economic expansion will double to 2.6 percent next year from 1.3 percent in 2013, the worst performance in 12 years.

“We continue to attach a 40 percent probability to another rate cut, with June or July the most likely timing,” Nora Szentivanyi, an economist at JPMorgan & Chase Co. in London, said in an e-mailed note. “The vagueness of today’s policy guidance suggests the MPC is not yet convinced that growth and inflation will materially undershoot its projections.”

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