Scandal Underwhelms Traders Burning for Poland Rate Cuts

Derivative traders are increasing bets that Poland will cut interest rates, downplaying prospects that the tape scandal embroiling central bankers to politicians will affect monetary policy.

Forward-rate agreements show wagers for a quarter-point rate cut within three months, the most since secretly taped recordings of central bank Governor Marek Belka and the Interior Minister Bartlomiej Sienkiewicz went public on June 14. Bonds and the zloty held onto gains after Prime Minister Donald Tusk asked lawmakers for a vote of confidence to bolster his government amid the crisis. Lawmakers voted 237 to 203 in favor of the cabinet late yesterday.

Belka, who has vowed not to resign, said in a Bloomberg interview two days ago that the scandal won’t knock monetary policy off track. Pressure to lower borrowing costs is intensifying after cuts this month by the European Central Bank and Hungary, according to ING Groep NV.

“Belka shut off speculation by saying he has no plans to resign and put the tapes to the background of monetary policy,” Adam Antoniak, a senior economist at UniCredit SpA’s Polish unit Bank Pekao SA, said by phone yesterday. “Tusk getting a strong mandate to govern limits speculation over the stability of the cabinet.”

Secret Recordings

The Wprost magazine published a secretly recorded June 2013 conversation between Belka and Sienkiewicz, in which the central bank chief purportedly offered the ruling party an election-year stimulus in exchange for amendments to the central bank law.

The spread between three-month forward rate agreements and the Warsaw Interbank Offered Rate fell to 24 basis points at 11:16 a.m. in Warsaw. It narrowed last week amid concern that policy makers would seek to keep rates on hold for longer to underline their independence after Belka’s taped comments suggested he may be willing to help the government win an election.

“Don’t count on our monetary policy being changed after what has happened,” Belka said in the interview. “Of course my credibility was hurt. And one way to rebuild it is to stay the course.”

The scandal won’t affect the work of the MPC, Elzbieta Chojna-Duch, one of the nine rate-setters on the panel besides Belka, said two days ago, adding she may file a motion for an interest-rate cut in July. There’s no “broader economic context” of the tape scandal, Jan Winiecki, a fellow policy maker, also said yesterday.

Independence ‘Doubts’

The Monetary Policy Council will vote to lower its benchmark rate from a record-low 2.5 percent in September, ING economist Grzegorz Ogonek said by phone from Warsaw yesterday. “The macroeconomic situation will outweigh doubts over the central bank’s independence,” he said.

Retail sales in eastern Europe’s largest economy increased 3.8 percent in May from a year earlier, dropping from an 8.4 percent pace in April and missing a 6.2 percent median estimate in a Bloomberg survey of 23 economists, the Statistics Office said today. While economic growth accelerated to 3.4 percent in the first quarter, the fastest in two years, consumer price gains unexpectedly slowed to an annual 0.2 percent in May, staying below the MPC’s 2.5 percent target for an 18th month.

“What we have is not yet deflation, but we could have a negative inflation index in the third quarter,” Belka said. “Up to a certain point, the only option for the future was to increase interest rates. Now we have take into account the option to decrease them as well. Of course, we’re not planning to and a rate cut is still rather improbable.”

‘External Factors’

Hungary’s central bank said on June 24 it may reduce its benchmark rate further after cutting it to a record-low 2.3 percent in its 23rd consecutive cut. Hungarian inflation stayed below zero for a second month in May. The European Central Bank this month lowered its deposit rate to minus 0.1 percent and reduced the main refinancing rate to an all-time low 0.15 percent as it battles the threat of deflation.

“I see a lower likelihood of rate cuts than the market as deflation will be caused by external supply factors,” which local policy makers have no control over, Marcin Karasiewicz, a fixed-income and interest-rate derivatives trader at PKO Bank Polski SA, said by e-mail yesterday.

The zloty was little changed at 4.1376 per euro today. The yield on Poland’s two-year government notes increased three basis points 2.52 percent, rising from an all-time low yesterday and boosting the spread over similar-maturity German securities rose to 249 basis points.

“The tape scandal is fading away,” Grzegorz Maliszewski, chief economist at Bank Millennium SA, said by phone yesterday. “Macroeconomic and global factors are now coming back into the spotlight.”

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