Poland Cuts Rates to Record as Economy Outlook Ends EasingPiotr Skolimowski
Poland’s central bank cut borrowing costs to a record low and said the cycle of interest-rate reductions was over with the European Union’s largest eastern economy poised to recover.
The 10-person Monetary Policy Council lowered the reference rate by a quarter point to 2.5 percent today, matching the estimate of 38 of 39 economists surveyed by Bloomberg. One predicted rates would stay unchanged. Rates should remain at current level “at least” until the end of the year, Governor Marek Belka said after the decision.
Poland has cut borrowing costs by 2.25 percentage points since November as the economy slowed. Since a four-year low in the first quarter, retail sales unexpectedly rose, manufacturing expanded and business confidence in Germany, Poland’s biggest export market, improved for a second month in June.
“The worst is over for the Polish economy,” Belka told reporters at a news conference in Warsaw. “We are now going to see a gradual recovery and the end of the easing cycle is a certain expression of the MPC’s optimism.”
The zloty strengthened 0.6 percent to 4.3107 per euro at 5:39 p.m. in Warsaw. The yield on the two-year government bond rose two basis points to 2.98 percent.
Borrowing costs will now stay unchanged until at least the third quarter of next year, according to a Bloomberg survey of 11 economists.
Rates will be held until “inflation rises persistently above 2 percent, which may take more than a year,” Mateusz Szczurek, chief economist for central and eastern Europe at ING Groep NV in Warsaw, said in an e-mailed report before the decision.
A new projection by the central bank staff released today showed inflation will probably reach 0.6 to 1.1 percent this year and 0.4 to 2 percent in 2014. Policy makers target a medium-term rate of 2.5 percent, with a tolerance range of 1 percentage point in either direction.
The central bank also lowered its forecast for economic growth through 2015. It expects expansion in a range of 0.5 percent to 1.7 percent this year and 1.2 percent to 3.5 percent next, according to the statement.
“There is a good chance that today’s cut was indeed the last in the cycle,” Nora Szentivanyi, an economist at JPMorgan Chase & Co, said in e-mailed comment today. “That said, it is somewhat surprising that the NBP is sending such an explicit message about ending its easing cycle when it expects inflation to remain firmly below its target for an extended period.”
Central bankers across eastern Europe have been easing monetary policy as the euro area’s debt crisis saps demand for exports. Hungary delivered its 11th consecutive quarter-point cut last week, while Romania lowered borrowing costs for the first time in more than a year yesterday. Unlike Poland today, both indicated further reductions were possible.
Economic growth has showed signs of improvement. Retail sales unexpectedly increased 0.5 percent in May after falling
0.2 percent the previous month as the jobless rate dropped to
13.5 percent from 14 percent. The purchasing managers’ index, a gauge of manufacturing, rose to 49.3 in June from 48 in May, beating economist forecasts as new orders grew for the first time since January 2012.
“We are seeing that for some time now the slowdown hasn’t been deepening,” Belka said at the conference. “There are reasons to believe that the economy is alive and not doing badly at all. Obviously, we are waiting for more solid recovery because that’s the only thing that will satisfy us.”
The U.S. Federal Reserve signaled it may begin to remove monetary stimulus if the recovery in the world’s biggest economy gains traction. The move has led to a sell-off in emerging-market bonds and currencies.
Foreign investors sold 2 percent of their Polish government bond holdings in June, the Finance Ministry said last week. The zloty, which slid to its weakest level in a year on June 21, lost 3.4 percent in the second quarter, its worst performance since the third quarter of 2011.
The capital outflow and the currency weakening were “moderate” and there were no reasons for “excessive” concern, according to Belka.
“The impact of recent zloty weakening on inflation and GDP is comparable with a 50 basis-point cut,” Radoslaw Bodys, chief economist at PKO Bank Polski SA, wrote yesterday in an e-mailed report. “The change in global market conditions coupled with a deeply divided MPC and the significant scope of monetary easing so far suggest that it’s the right moment to end the cycle.”