Rates Traders Get No Respect as MPC Resists Cuts: Poland Credit

Interest-rate traders are betting the Polish central bank is more dovish than it’s letting on.

Forward-rate agreements, used to speculate on borrowing costs, show the market predicting at least a 25 basis-point reduction in Poland’s benchmark by October, the most in a year, according to data compiled by Bloomberg. The extra yield investors demand to hold the nation’s two-year notes instead of equivalent German debt fell last week to the least since September 2008.

The central bank, which opened the door to lower rates in June when Governor Marek Belka said the chance of monetary easing “isn’t zero,” may have cooled on the idea. Just two of the seven policy makers who have spoken since the July 2 meeting want to reduce rates from the record-low 2.5 percent, with others saying they expect inflation to return following a period of falling prices amid an economic recovery.

“Traders appear to believe the data would confirm that growth is slowing and deflation will be prolonged,” Jaroslaw Janecki, chief economist for Poland at Societe Generale SA in Warsaw, said by phone yesterday. “That would force policy makers to adjust their rhetoric in favor of easing.”

While the central bank dropped wording in a statement from its last meeting that it would leave borrowing costs unchanged through September, most policy makers favor keep rates on hold, saying the economy is strong.

Inflation Outlook

Inflation, which rose to 0.3 percent in June and has remained below the central bank’s 2.5 percent target for 19 months, will temporarily dip below zero in the coming months, they said. Belka told reporters after the meeting “all possible steps” could be expected in coming months, depending on the economy.

Policy makers would run the risk of “conducting pro-cyclical policy” by cutting rates now, Andrzej Bratkowski, one of the 10 Monetary Policy Council members, said yesterday. Ultra-slow inflation or even deflation in the summer months shouldn’t be an argument to reduce rates, Anna Zielinska-Glebocka, another council member, said in an interview published today.

While price growth will stay under the central bank’s target through the end of 2016, economic growth will exceed 3 percent, according to its staff’s projection for three years. An inflow of funds from the European Union should give the economy a boost, Belka said on TOK FM radio last week.

Strong Growth

“The economy is likely to have slowed in the second quarter compared with the first, but even despite this, growth remains relatively strong,” Piotr Kalisz, an economist at Citigroup Inc. in Warsaw, said in an e-mailed note. “This is hardly an argument that could change the views of Polish central bankers and justify rate cuts.”

The zloty slipped less than 0.1 percent to 4.1406 per euro at 2:24 p.m. in Warsaw, leaving it 0.5 percent stronger since the end of March.

Further gains in the currency below 4 and a slowdown in growth to around 3 percent in the second quarter may lead to a rate cut, according to Krzysztof Madej at Altus TFI SA mutual fund in Warsaw.

Among the signs that the economy may be losing steam was a decline in purchasing managers’ index for Polish manufacturing for a fourth month in June. Industrial production rose the least in four months in May. The economy probably expanded 3.3 percent in the second quarter, down from a two-year high of 3.4 percent in the previous period, according to a Bloomberg survey.

The pace of growth in the coming years will “moderate” and that should prompt policy makers to discuss a quarter-point rate cut at their next meeting in September, Elzbieta Chojna-Duch, another council member, said on TVN24 BiS on July 8.

“Inflation is no longer the No. 1 topic,” Altus TFI’s Madej, who helps manage $1 billion as head of fixed-income assets, said in an interview July 8. “That’s been priced in already. Investors are now focused on how growth will perform.”

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