Polish Economic Growth Slump Supports Interest Rate-Cut Case

Polish economic growth matched an 11-year low in the first quarter, boosting the case for further interest-rate reductions by the nation’s central bank.

Gross-domestic product grew 0.4 percent from a year earlier between January and March, compared with 0.7 percent in the previous quarter, according to a flash estimate published today by Central Statistical Office in Warsaw. The figure matches the slowest expansion since the fourth quarter of 2001, also reached in the first quarter of 2009. Growth was slower than the 0.7 percent median estimate of 25 economists surveyed by Bloomberg.

While central bank Governor Marek 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 last week, further evidence of economic weakness will probably tip the balance toward more easing next month, according to Marcin Mazurek, an economist at BRE Bank in Warsaw.

“The May rate cut was based on monthly data and policy makers’ gut feeling there was a risk,” Mazurek said by phone. “Now that risk has materialized and a number of central bankers are already on record saying that any further cuts should be done fast.”

The zloty weakened less than 0.1 percent to 4.1622 per euro at 11:54 a.m. in Warsaw. The yield on the benchmark two-year zloty bond fell 6 basis points to 2.51 percent, a record low.

Rate Reductions

Traders increased bets on rate reductions after the GDP data. Six-month forward-rate agreements are trading 63 basis points below the Warsaw Interbank Offered Rate, from 56 basis points yesterday, indicating more than two quarter-point rate reductions by November.

The growth figures are subject to a revision when the statistics office releases first-quarter GDP data on May 29.

Growth has been squeezed in the largest eastern European Union member as the 17-nation euro region, which buys more than half of Polish exports, remains in a recession for a second year. With the growth outlook weakening and unemployment near a six-year high, Poles are also more reluctant to spend. Individual consumption declined 0.2 percent year on year in the fourth quarter, the first drop since records began in 1996, according to a report on April 22.

Better Sooner

While there’s not much scope for further monetary easing, any decision should come “sooner rather than later,” Anna Zielinska-Glebocka of the Monetary Policy Council was quoted as saying today by the PAP newswire. More rate cuts would be ineffective in stimulating growth, rate setter Jan Winiecki said in an interview on TVN CNBC after the data.

“There’s a false conviction that lower borrowing costs can make producers and consumers change their thinking on investment or durable-goods purchases, when they’re already feeling a lot of uncertainty,” Winiecki told the broadcaster.

Even so, the slowest inflation in seven years may also create scope for further easing.

Inflation decelerated for a sixth consecutive month to 1 percent in March from 3.8 percent in September. A report tomorrow will probably show annual inflation decelerated to 0.7 percent last month, the least since April 2006, a survey of analysts by Bloomberg shows.

“With CPI falling down to even 0.6 percent by June and only back to 1.1 percent by year end means that the real rate scope to cut is present for twice 25 basis points,” Peter Attard Montalto, a London-based economist at Nomura International Plc, said in an e-mail today.

The central bank will reduce borrowing costs by a quarter-point in June and July and take its main rate down to 2 percent or 2.25 percent by the end of the year, Rafal Benecki, chief economist at ING Bank Slaski SA, said by phone.

Marta Waldoch in Warsaw at mwaldoch@bloomberg.net

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