Ukraine Forces Belka Hand on Rates as Bonds Surge: Poland Credit

Polish zloty bonds rallied the most in eight months as the crisis in neighboring Ukraine prompted central bank Governor Marek Belka to say interest rates will stay at a record low for longer than previously predicted.

The spread between 10-year rates and similar-maturity German bunds compressed yesterday by the most in eight months, as the Polish yield tumbled 17 basis points to 4.20 percent, according to data compiled by Bloomberg. Forward-rate agreements showed traders paring their bets for an interest-rate increase to 9 basis points in the next nine months, down from 16 basis points a day earlier.

The central bank extended its guidance for unchanged interest rates by three months until at least the end of the September, citing a “safe path” of accelerating growth with below-target inflation, Belka said yesterday. The crisis in Ukraine, Poland’s eastern neighbor locked in a military standoff with Russia, may curb Polish exports, piling more goods into local markets and reducing price pressure, he said.

“With inflation running so low, they just do not need to hike,” Dmitri Barinov, a money manager overseeing $2.5 billion of debt at Union Investment Privatfonds in Frankfurt, said by e-mail yesterday. “I don’t expect any hikes till at least the second half of next year. Polish 10-year bonds have massive real yields and remain attractive.”

‘Right Track’

Inflation stabilized at a 0.7 percent annual rate in January, undershooting the central bank’s 2.5 percent target for a 14th month. The March staff projection, which policy makers on the Monetary Policy Council studied yesterday, showed price pressures will remain dormant in coming quarters.

“The situation in Ukraine accelerated our decision,” to extend guidance for rates, Belka said yesterday. Besides affecting Polish inflation, policy makers wanted to stress that events beyond the country’s eastern border didn’t pose “any threat, least in the monetary-policy context,” he said.

“We wanted to show our confidence in the strength of the economy and zloty,” he said. “Poland is on the right track.”

Inflation will amount to between 0.8 percent and 1.4 percent this year, down from as much as 2.2 percent seen in the central bank’s previous forecast from November.

Normalizing Policy

“The prospect of below-target inflation through next year should allow the MPC to wait until the growth recovery is cemented before starting to normalize policy,” Nora Szentivanyi, an economist at JPMorgan Chase & Co. in London, said in an e-mailed note yesterday. She pushed back her view on the timing of Poland’s next rate increase to the second quarter of 2015 from an earlier prediction of November.

The central bank has kept its main rate at 2.5 percent after lowering it by 2.25 percentage points between November 2012 and July last year. Record-low borrowing costs helped power Polish economic growth to 2.7 percent in the final three months of 2013, the country’s fastest pace since the first quarter of


Central bank staff also raised this year’s growth outlook to between 2.9 percent and 4.2 percent from the previous range of 2 percent to 3.9 percent, according to the statement. The projection doesn’t factor in the impact of Ukraine’s crisis, according to Belka.

Picks, Shovels

The conflict between Russia and Ukraine, whose leaders accuse President Vladimir Putin’s military forces of staging a covert invasion of its Crimean peninsula, may cut Polish growth by as much as 0.4 percentage point in 2014 if the conflict escalates, according to Ernest Pytlarczyk, chief economist at MBank SA in Warsaw.

This hasn’t been reflected in economic reports so far. Manufacturing expanded at the fastest pace in three years in February, according to a Markit Economics survey for HSBC published on March 3. New orders rose the most since April 2004 and employment increased “sharply,” the London-based research company said on its website.

“Data for the first and second quarters will surprise positively,” Pawel Radwanski, a fixed-income analyst at Raiffeisen Polbank SA, said by phone yesterday. “I’d stick to our forecast of a rate hike in November.”

The zloty gained 0.1 percent to 4.1802 per euro at 11:59 a.m. in Warsaw, paring this week decline to 0.5 percent, the steepest among 24 emerging-market currencies tracked by Bloomberg. The yield on 10-year government notes dropped three basis points today to 4.17 percent, narrowing the spread over bunds to 255 basis points, the lowest since Jan. 13.

Policy makers yesterday considered extending their steady rates guidance until the end of the year before settling on a shorter period, Belka said. However, the market shouldn’t expect they’ll “just break out the picks and shovels and start raising rates” once the third quarter ends, he told reporters.

“We are in a dream scenario for bonds with low rates, low inflation and pretty decent growth,” Lukasz Witkowski, a money manager at mutual fund PKO TFI SA, which has the equivalent of $1.8 billion in assets, said by e-mail yesterday.

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