Polish Yields Sink to Record on Surprise Rate Cut as Zloty Gains

Yields on Polish government bonds plummeted to record lows and the zloty strengthened after Narodowy Bank Polski unexpectedly cut interest rates.

The central bank lowered its reference rate by a quarter-point to a all-time low of 3 percent because of below-target inflation and doubts about the recovery in the euro region, Poland’s biggest export market, Governor Marek Belka said today. While further rate cuts are not ruled out, the reduction shouldn’t be seen as the “beginning of a new cycle of monetary easing,” he said.

“Belka was guarded in his comments about whether further policy easing is on the cards,” William Jackson, a London-based economist at Capital Economics Ltd, wrote in a note. “With inflation likely to fall further below the bank’s target and activity set to remain sluggish, we expect at least one more 25 basis point interest rate cut this year.”

Yields on two-year government notes fell six basis points, or 0.06 percentage point, to a record 2.57 percent at 8 p.m. in Warsaw, according to data compiled by Bloomberg. Rates on five-year debt tumbled 14 basis points, the most in a month. Six-month forward-rate agreements, derivatives used to bet on interest rate levels in November, declined 14 basis points.

Today’s quarter-point reduction was expected by 11 out of 38 economists surveyed by Bloomberg, with 25 predicting no change and two forecasting a 50 basis point cut. Poland’s annual inflation rate declined to 1 percent in March, the least in more than six years, compared with the central bank’s 2.5 percent target.

After an initial weakening after the rate announcement, the zloty rallied, advancing 0.2 percent to 4.1330 per euro.