Belka Rate-Cut Prospects Hobbled by Tusk Support: Poland Credit

Polish Prime Minister Donald Tusk’s show of support for the central bank governor ensnared in a tape-recording scandal risks delaying any interest-rate cuts that could boost his chances of re-election next year.

Forward rate agreements, contracts used to bet on borrowing costs, showed traders paring wagers on lower rates as Tusk said yesterday that Governor Marek Belka didn’t appear to violate laws in a secretly taped conversation with the interior minister, where he discussed possible support for the government. Yields on two-year zloty notes increased five basis points, the most in almost three months.

The imbroglio will probably prompt the Monetary Policy Council to show their autonomy by holding off easing, according to Anton Hauser at Erste Sparinvest KAG. Belka opened the door to possible rate reductions when he said there is a chance of monetary easing in 2014 because inflation may fall below zero this summer.

The probability of rate cuts has “decreased as they will want to show their independence,” Hauser, who helps oversee the equivalent of $2.2 billion as a fixed-income money manager at Erste in Vienna, said by e-mail yesterday. If the recording accurately reflects the conversation, it signals “politics is important in monetary policy,” he said.

‘Manipulated’ Tapes

Belka said in a statement two days ago that he never broke the law and that the recording was “manipulated” to suggest “an instance of the central bank governor exceeding his powers, which never took place.” Belka said he had no plans to resign, according to an interview yesterday with TVN network.

The gap between three-month forward rate agreements and the Warsaw Interbank Offered Rate narrowed to 17 basis points yesterday compared with 25 basis points on June 13, according to data compiled by Bloomberg. The extra yield on Polish 10-year zloty bonds over German bunds dropped one basis point to 217 basis points, declining from a almost two week high. The zloty strengthened 0.1 percent to 4.1388 per euro at 9:20 a.m. in Warsaw, after a 0.5 percent slide yesterday.

Poland’s policy makers have kept the benchmark main rate at record low of 2.5 percent for 11 months. That contrasts with Hungary, which has run its easing cycle for 22 consecutive months, the longest streak in Europe. The European Central Bank, earlier this month, became the first major central bank to take one of its main rates negative.

‘Best Story’

Poland’s $490 billion economy, the only one in the European Union to avoid recession since 2009, accelerated to its fastest pace in two years in the first quarter, expanding 3.4 percent from a year ago. Inflation dropped to an annual 0.2 percent pace last month, tied for the lowest on record.

The tape recording of Belka’s comments from the July 2013 meeting, in the version made public, will probably have less effect on Poland’s rate outlook than this month’s stimulus steps from the ECB, said Viktor Szabo, a money manager at Aberdeen Asset Management Plc.

“In times when central banks around the world look at unconventional tools to help economies and ensure financial stability, it’s hard to see Belka’s comments as completely unjustified, or going far beyond the central bank’s remit,” Szabo, who helps oversee more than $13 billion in emerging-market debt in London, said by e-mail yesterday. “Poland remains by far the best story in the region fundamentally.”

Linguistic Regret

Belka, who was heard on the tape insulting panelists on the 10-member Monetary Policy Council, said yesterday he “regretted” the language he used.

The governor’s comments are “unfair and disrespectful” to the council and the governor will be asked for explanations at today’s working meeting, policy maker Andrzej Kazmierczak said by phone yesterday. Elzbieta Chojna-Duch, another MPC member, said she had “forgiven” Belka and said he shouldn’t quit.

“This may somewhat complicate decision-making as the trust between the governor and the MPC members has weakened,” Gyula Toth, a money manager at Ithuba Capital AG in Vienna, who helps oversee $543 million, said by e-mail yesterday. “So the expected rate cut will probably be delayed.”

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