Poland Rate Cut May Come in June at Earliest, Glapinski Says

Poland’s central bank should wait until June at the earliest before potentially resuming interest-rate cuts because it needs to “better assess” the prospects for economic recovery, according to policy maker Adam Glapinski.

The 10 members of the Monetary Policy Council “are split” and they lack consensus on whether the pause in monetary easing should “last a quarter,” he said in an interview on April 12.

Policy makers last week left their benchmark seven-day rate unchanged at 3.25 percent for the first time in five months as they expect record-low borrowing costs will reinvigorate the European Union’s largest eastern economy. While the central bank projects a “gradual” recovery, recent reports showed a contraction in manufacturing deepened last month, while retail sales fell in February and unemployment rose to a six-year high.

“The pause before we potentially move to another cycle of rate cuts should last at least a quarter, ideally until June or even July,” Glapinski said. “Interest rates are already at historic lows and cutting them further would be an unconventional step.”

The zloty traded 0.2 percent weaker against the euro at 4.1098 per euro at 3 p.m. in Warsaw. The currency has lost 0.6 percent to the euro since the start of the year, according to data compiled by Bloomberg.

Belka’s Comments

Glapinski’s remarks echoed comments from Governor Marek Belka, who told reporters on April 10 that deciding on further rate reductions becomes “difficult” as borrowing costs approach a level where “monetary policy stops being conventional.”

Still, “some correction of the current rate level isn’t excluded,” MPC member Elzbieta Chojna-Duch was quoted as saying today in an interview with PAP newswire. Polish rates remain “moderately high” compared with other countries and the MPC may conduct a “binding assessment” of the economy that could be basis for further rate cuts before July, she was cited by PAP as saying.

The central bank may be emboldened to act if inflation drops “even further below” 1.5 percent, the lower end of its tolerance range, Glapinski said. Price growth slowed to 1 percent in March from a year earlier, after a 1.3 percent gain in the previous month, the Statistics Office said in Warsaw today. Economists had forecast a rate of 1.1 percent, according to the median of 34 estimates in a Bloomberg survey.

Longer Trajectory

“The March inflation data are important, but it’s worth looking at the longer trajectory through mid-year,” Glapinski said. “We need to think hard before taking unconventional action.”

Easing could also be triggered by “very weak data” showing that the economic downturn is deepening instead of flattening out, the rate setter said. “I prefer a conventional approach: finish a round of cuts, assess what’s happening in the economy, and then decide about further cuts.”

Glapinski’s comments show potential rate cuts will be “data-driven decisions,” Jaroslaw Janecki, Warsaw-based chief economist at Societe Generale SA, wrote in an e-mailed report.

Derivatives traders are betting that policy makers will resume monetary easing by July and reduce borrowing costs by another half a percentage point by the end of the year, forward-rate agreement prices show.

‘Get Moving’

Poland’s central bank has delivered five rate cuts since November in a bid to stave off the country’s deepest slowdown in 12 years. While the bank’s March staff projections call for domestic demand to recover, doubling economic growth to 2.6 percent next year, European Central Bank President Mario Draghi said this month that risks remain on the downside for the euro area. Poland sends 52 percent of its exports to 17-nation currency region.

“The key question that we need to answer is whether the economy has a chance to get moving in the second half,” Glapinski said. “Nobody is able to forecast that at this stage. The performance of the German economy and whether the recovery will start there will certainly be key.”

The government has blamed the Narodowy Bank Polski, which was the only EU central bank to raise interest rates last year, for worsening the economic slowdown by starting monetary easing too late and by reducing rates too little. Borrowing costs can still be pushed down “quite significantly,” Finance Minister Jacek Rostowski said in Dublin on April 11.

The government is ready to revise this year’s budget if necessary, Rostowski said last week, after the first-quarter budget deficit widened to 70 percent of the annual limit as the slowdown curbed tax revenue.

A potential deficit revision “shouldn’t have an impact on the MPC’s decisions and the way it runs policy,” Glapinski said. Poland’s monetary stance “is already sufficiently loose and the policy mix is appropriate.”

Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

Before it's here, it's on the Bloomberg Terminal.