Belka Follows Draghi as Yields Signal Deeper Cuts: Poland CreditAgnes Lovasz and Maciej Onoszko
The Polish central bank’s unexpected cut in interest rates is prompting investors to anticipate more reductions, brushing aside Governor Marek Belka’s efforts to temper speculation for further easing.
The yield on five-year government notes tumbled 6 basis points today, after falling 14 basis points yesterday, to a record-low 2.61 percent as of 10:09 a.m. in Warsaw. That narrowed the premium over similar German debt to 226 basis points, the least since September 2008. Three-month forward-rate agreements, derivatives used to bet on interest rate levels in August, fell 18 basis points in the last two days.
Belka said policy makers are in a “wait-and-see” mode after lowering the main rate by a quarter-point to a record 3 percent. As the inflation rate fell to an almost seven-year low in March and the economy is growing at the slowest pace since 2009, the difference between Poland’s benchmark and that of the euro region, its main trading partner, widened last week as the European Central Bank cut borrowing costs to an all-time low.
“Belka said it is not the beginning of a new cycle, but the market clearly did not believe him,” Pawel Radwanski, a fixed-income analyst at Raiffeisen Bank Polska in Warsaw, said by phone yesterday. “A further cut is most likely.”
Yesterday’s quarter-point reduction was predicted by 11 of 38 economists in a Bloomberg survey, where 25 said rates would remain unchanged and two forecast a cut to 2.75 percent. While Belka signaled yesterday that the benign inflation outlook made it possible to lower borrowing costs, he said that the scope for further easing is limited.
“We concluded that consumer-price growth and high-frequency data show that the inflation rate could stay on a very low level,” he said at his post-meeting news conference. “That created scope for cutting rates and we decided to use it. Don’t treat this as the beginning of a new cycle of monetary easing.”
Policy makers reduced borrowing costs by a total of 150 basis points between November and March, when they indicated that the easing had run its course. “Ambiguous” signs of a recovery prompted them to pause last month, minutes of the meeting showed.
Since then, evidence has built that the economy hasn’t turned the corner and the inflation rate in March dropped to 1 percent, the lowest since June 2006, as consumer confidence ebbed and the government pressed ahead with efforts to narrow the budget deficit.
Yesterday’s rate move “should be treated as a certain adjustment of what we announced two months ago and implemented last month,” Belka said.
The recession in the 17-nation euro area, which buys 52 percent of Polish exports, is preventing Polish growth from picking up pace. The purchasing managers’ index, a gauge of manufacturing, fell to 46.9 in April, the weakest reading since July 2009, HSBC Holdings Plc said this month.
The European Commission last week cut its 2013 growth forecast for Poland to 1.1 percent from 1.2 percent, predicting the slowest expansion in 12 years.
While bond and derivative traders are betting on the benchmark rate going to records, some economists see limited scope for further cuts because of an impending global recovery.
“It’s very difficult to see them cutting much more, in particular Belka, who’s reaching the edge of his comfort zone on real rates,” Peter Attard Montalto, an economist at Nomura International in London who forecast rate would be left unchanged yesterday, said by phone yesterday. “It’s possible to squeeze out one more, but the main thing is growth will probably start turning around by July.”
The European Central Bank’s rate cut helped tip the balance in favor of easing this month, according to economists including Piotr Bujak of Nordea Bank AB in Warsaw, who was among the minority that predicted yesterday’s move correctly.
The ECB last week cut interest rates for the first time since July and President Mario Draghi said the slowdown “has spread to parts of the euro area where so far the transmission of monetary policy has never been questioned.”
Bank of America Merrill Lynch revised its Polish rate forecasts and now expects the central bank to bring rates to 1.5 percent in the second half of the year, economist Raffaella Tenconi wrote in an e-mailed note before yesterday’s decision. The bank previously predicted rates will reach 2.5 percent by January 2014.
There’s “growing evidence of a persistently weakening euro zone, including Germany, and tighter fiscal constraints” in Poland, according to Tenconi, one of the two analysts who predicted a half-point cut for yesterday. She said yesterday’s rate cut doesn’t change her interest-rate forecast.
The additional yield investors demand to hold Polish dollar-denominated bonds rather than U.S. Treasuries fell one basis point, or 0.01 percentage point, to 117 basis points today, according to indexes compiled by JPMorgan. The extra yield on 10-year zloty yields over German bunds was unchanged at 183, data compiled by Bloomberg shows.
The zloty strengthened 0.2 percent to 4.1263 per euro today. It has gained 0.9 percent in the past six months, the best performance among 31 major currencies tracked by Bloomberg after the Mexican peso and Israeli shekel.
The cost of Polish credit-default swaps rose one basis point to 78, data compiled by Bloomberg show. The swaps, which decline as perceptions of creditworthiness improve and rise as they worsen, cost 96 basis points less than the Markit iTraxx SovX CEEMEA Index of countries in central and eastern Europe, the Middle East and Africa. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower renege.
“I got it wrong today by the way as I thought that the NBP would be its prudent self at today’s meeting,” Benoit Anne, head of emerging-market strategy at Societe Generale SA in London, said in an e-mail. “But as it turns out, the NBP has lately been a Dr. Jekyll and Mr. Hide story, and somewhat difficult to read. Lesson learnt the hard way here: the NBP is no longer the most conservative central bank in EM.”