Poland Keeps Rate Unchanged as Ukraine Threatens Economy

Poland’s central bank left its benchmark interest rate at a record low for a 10th month as risks mount that the Ukrainian conflict may threaten the country’s economic revival.

The Narodowy Bank Polski held its seven-day reference rate at 2.5 percent as predicted by all 29 economists surveyed by Bloomberg. Policy makers reiterated their pledge for an “extended period” of interest-rate stability at least until the end of September amid a “gradual” economic recovery, according to a statement released today.

The crisis in neighboring Ukraine is casting a pall over the Polish economy even as inflation remains in check, with a gauge of manufacturing sentiment falling to a nine-month low in April. The “best moment” to consider changes in communicating the central bank’s policy intentions will come in July, Governor Marek Belka said at the news conference in Warsaw.

“We really don’t know what’s going to happen” in Ukraine “as the situation is dynamic and very serious,” Belka told reporters. “That’s one of the reasons why we are being cautious in our policy on rates.”

At the same time, the possible impact of the Ukrainian crisis on curbing Polish economic growth and inflation shouldn’t be interpreted as a signal that rate increases “can be put off indefinitely,” he said.

Rate Expectations

Forward-rate agreements, used to lock in borrowing costs, show traders paring bets on rate increases during the next 12 months to less than a quarter point, down from 61 basis points on Jan. 31, according to data compiled by Bloomberg. The zloty, which has lost 1.1 percent this year, traded 0.2 percent stronger at 4.1914 per euro at 4:45 p.m. in Warsaw.

Weaker growth in output, orders and new export business pushed Poland’s purchasing managers’ index, a gauge of manufacturing, to a nine-month low of 52 in April from 54 in March, a Markit Economics survey for HSBC Holdings Plc showed this month.

“Uncertainty about the situation in Ukraine poses a growing risk to economic recovery,” Dariusz Winek, a Warsaw-based economist at Bank Gospodarki Zywnosciowej, said today by e-mail. “Under a scenario of slowing growth later this year and persistent low inflation, interest rates could remain unchanged even until the third quarter of 2015.”

Outlook Dims

The economy may expand 3 percent in the final three months of the year, Winek predicts, revising an earlier forecast of 3.7 percent made before the outbreak of the Ukraine crisis.

Polish exports to Russia slid almost 5 percent in euro terms through February, according to data from the statistics office. “Negative effects from the conflict may be more noticeable only in the coming months,” Economy Minister Janusz Piechocinski told TVN24 on May 2.

Russia and Ukraine together account for about 8 percent of Poland’s exports. That compares with the 25 percent share taken by Germany, the nation’s biggest trading partner.

The European Commission predicted May 5 that Poland’s economy will grow at the third-fastest pace in the 28-nation bloc, behind Latvia and Lithuania. The commission revised its 2014 forecast for Poland to 3.2 percent from 2.9 percent as job gains and higher wages boost domestic demand.

The forecast is below the central bank’s projections, which see the economy expanding 3.6 percent this year from 1.6 percent in 2013.

Belka’s ‘Key’

The speed and sustainability of economic growth in the coming quarters may hold the “key” to the central bank’s policy plans, Belka said today.

The expansion probably reached an annual pace of 3.1 percent in the first quarter, the statistics office will say on May 15, according to the median estimate in a Bloomberg survey of three economists.

The Ukraine standoff may have “mixed” consequences, central banker Andrzej Rzonca said on April 17. Declining exports to Russia and its embargo on Polish meat may curb inflation, while an increase in energy prices or a weaker zloty could have the opposite effect, according to Rzonca.

Consumer prices rose 0.7 percent from a year earlier in March, unchanged from February. The inflation rate won’t reach the central bank’s 2.5 percent target until 2016, according to its latest forecast.

“The share of Ukraine and Russia in Poland’s foreign trade is low, so I wouldn’t see much of a risk from this side,” Jaroslaw Janecki, a Warsaw-based economist at Societe Generale, said yesterday. “Increased uncertainty usually leads to postponing investment decisions and I’d worry more about that. We could see it happening with some delay.”

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