ECB Talking Up QE Focuses Belka on Zloty Defenses: Poland Credit

European Central Bank President Mario Draghi’s plan for further monetary easing is prompting his counterpart in Poland to respond with preparations of his own to keep the zloty from threatening the nation’s recovery.

The Polish central bank is “preparing instruments” to intervene on “asset markets of different classes,” Governor Marek Belka said on April 13 in a panel discussion at the International Monetary Fund’s meeting in Washington. The comments came a day after Draghi said the strengthening of the euro required further monetary stimulus.

“Poland needed to respond to the ECB becoming more dovish,” Grzegorz Ogonek, a Warsaw-based economist at ING Bank Slaski SA, said by phone yesterday. While Belka “probably won’t follow the ECB step by step, the central bank needs to show it won’t persist in running a tighter monetary policy” to avoid turbulence on the foreign-exchange market, he said. “Poland doesn’t need a stronger zloty.”

Belka’s comments reflect the central bank’s intention to remain agile as the ECB’s plans take shape. Yields on Poland’s 10-year bonds fell to the lowest in more than eight months last week, narrowing the spread over German bunds to the least in three months, after Draghi said April 3 that policy makers debated what form of quantitative easing, or large-scale asset purchases, they might need to use to bolster prices.

Accelerating Growth

The Belka-led Monetary Policy Council kept the benchmark rate at a record low 2.5 percent last week, seeking to protect Poland’s recovery. The economy will probably grow at 3.1 percent this year, almost double the pace in 2013, according to median of 37 estimates in a Bloomberg survey of analysts. The zloty is forecast to appreciate to 4.08 against the euro by the end of this year from 4.1853 at 12:06 p.m. in Warsaw today, for a change of 2.6 percent, another survey showed.

Draghi’s comments, echoed by ECB officials, were a theme of weekend meetings of the IMF and World Bank that global policy makers used to urge Europe to address lackluster inflation before it turns into Japanese-style deflation. The warning, which prompted the biggest intraday drop in the euro against the dollar in three weeks, marked the strongest stance yet taken by Draghi since he and fellow policy makers began complaining in early March about the euro’s rise.

Belka Counterpoint

“Since the ECB intervened verbally, Belka did the same,” Arkadiusz Urbanski, a fixed-income analyst at UniCredit SpA’s Polish unit Bank Pekao SA, said by phone yesterday. “It’s important to notice where and when these words were said. Europe’s QE was probably the most important topic” in Washington, he said.

Easing by the ECB would probably improve bank lending and boost domestic demand in the euro area, which in turn should support currencies in central and eastern Europe, Citigroup Inc. said in a report on April 10.

“In the case of further rallies in bunds, central and east Europe spreads will look very attractive,” Luis Costa, a London-based strategist at Citigroup, said by e-mail yesterday. Costa said he’s “still long” Polish and Czech government bonds. “Real money flows from European banks into anything higher yielding will be probably augmented.”

Ukraine Clashes

Clashes in Ukraine may mitigate any rally spurred by the ECB, according to ING’s Ogonek. If not for the threat that the conflict will escalate, “the risk of excessive appreciation would be alive,” he said.

European officials weighed expanding sanctions against Russia over Ukraine, where they say the government in Moscow is stoking deadly separatist unrest with the same methods it used to destabilize and annex Crimea.

The zloty has weakened 0.7 percent this year against the euro, compared with a 3.4 percent decline in Hungary’s forint and a 9.2 percent drop in the ruble. The yield on Poland’s 10-year bonds fell one basis point to 4.05 percent, within four basis points of the lowest since July 29, which was reached last week. The spread over similar German bonds was little changed at 253 basis points.

Belka’s comment represents a “softening” of the Polish central bank’s stance, which like the ECB “doesn’t want a too strong currency,” Stephan Imre, a Vienna-based economist at Raiffeisen Bank International AG, said by phone yesterday. “This is a preparation for more ECB easing.”

Before it's here, it's on the Bloomberg Terminal.