Polish Growth Below 3% May Trigger Rate Cut, Banker SaysDorota Bartyzel and Piotr Skolimowski
Poland’s economy would have to lose steam, rather than just undergo slower inflation, to justify an interest-rate cut, central banker Andrzej Bratkowski said.
Monetary-policy makers should wait for more evidence the recovery is flagging before lowering borrowing costs, he said. If data confirm a slowdown, the central bank may consider a rate cut of 50 or even 75 basis points, according to Bratkowski.
“Low inflation alone shouldn’t be an argument for reducing rates if the economy stays strong,” he said yesterday in an interview in Warsaw. If growth dips below 3 percent, “it would be, in my opinion, a signal to cut, especially in the environment of external easing and a strong zloty.”
Central bank Governor Marek Belka returned rate cuts to the agenda by saying June 3 that the chance of easing monetary policy in 2014 “isn’t zero” because consumer prices may fall in the summer. While first-quarter growth in the European Union’s biggest eastern economy quickened to 3.4 percent from a year earlier, manufacturing hit an 11-month low in May.
Until last month, derivative traders saw the central bank’s next move as a rate increase. Now they’re wagering on an almost quarter-point reduction in borrowing costs through September, trading in forward-rate agreement contracts shows. The benchmark has been at a record-low 2.5 percent for almost a year.
The zloty traded less than 0.1 percent stronger at 4.1049 per euro from at 2:25 p.m. in Warsaw, extending last week’s 1.1 percent advance, the biggest since February. Yields on two-year government notes rose two basis points to 2.53 percent.
Investors have “clearly overreacted” as nothing that’s happened justifies such a “radical” change in expectations, according to Bratkowski. As long the economy continues to expand, even a bout of deflation “isn’t disturbing” as low prices should help bolster consumption, he said.
The inflation rate dropped to a 10-month low of 0.3 percent in April. While it accelerated to 0.5 percent in May, according to the median estimate of 28 economists surveyed by Bloomberg, the consumer-price index probably stayed below policy makers’ 2.5 percent target for an 18th month.
The government “hopes” Poland won’t experience deflation this year and that consumer-price growth will accelerate to a “normal” level of about 2 percent in 2015, according to Prime Minister Donald Tusk.
“An optimal scenario for Poland would be a combination of steady rates and a slow acceleration of inflation through 2015,” Tusk said at a news conference today in Warsaw.
For Poland, gross domestic product, not inflation, will be the key for monetary policy, with the focus on growth forecasts for the next two years, Bratkowski said. “It’s possible Poland will continue to grow even if the West stagnates.”
Poland sells more than half of its exports to the euro area, whose economy is struggling for traction after exiting a record-long recession. The European Central Bank unveiled an unprecedented round of measures last week to help transmit record-low interest rates and stave off deflation. That sent the zloty to its strongest level against the euro since 2013.
While the ECB move raises concern about the possible inflow of short-term capital to Poland, the currency’s strengthening wasn’t of the magnitude that would require “a preemptive” rate cut, according to Bratkowski.
The Polish currency is the sixth-best emerging-market performer against the euro over the last week with a 1.1 percent advance, according to data compiled by Bloomberg.
Poland’s economy will grow 3.6 percent in 2014, more than double last year’s pace, the central bank predicts. An interest-rate increase can’t be ruled out “at the end of 2014 or the beginning of 2015” if the economy continues to expand at more than 3 percent, according to Bratkowski. If growth “stabilizes” at about 3 percent, the central bank should hold fire, he said.
One policy Bratkowski’s sure of is that pledging stable rates for months to come should be abandoned.
“In the eye of a policy maker, the situation is much more complex now,” he said. “We’ve become more concerned about the economy because we can’t be sure which direction it will take in the coming months.”