Top Polish Rate Forecaster Seeing Cut Counters Consensus

The best Polish interest-rate forecaster is in the minority predicting the central bank will cut borrowing costs for the first time in 14 months tomorrow.

Jakub Borowski, the chief economist at Credit Agricole SA’s Polish unit, said policy makers will lower the benchmark rate by 25 basis points to a record 2.25 percent. A manufacturing gauge dropped for a sixth month in August, data showed yesterday, casting doubt on central bank projections for economic growth to pick up in the second half and boost consumer prices, he said. Borowski has accurately predicted the outcomes of Polish interest-rate meetings since at least June last year.

“A rate cut is very justified,” Borowski said by phone from Warsaw yesterday. “Data are significantly diverging from what the central bank says in its projection.”

Forward-rate agreements, derivatives used to speculate on the direction of interest rates, show traders betting on almost two quarter-point reductions over the next three months, according to data compiled by Bloomberg. Expansion of gross domestic product slowed from a two-year high last quarter and the country registered it first negative price growth since at least the 1980s. This “begs for” a reassessment of central bank assumptions, Governor Marek Belka said last week.

‘Split’ Panel

Seven of the 36 economists surveyed by Bloomberg are forecasting a rate cut this week, while the rest predict the 10-member Monetary Policy Council led by Belka to hold its fire.

The panel “is split right down the middle,” with the governor seen tipping the balance in favor of a cut, according to William Jackson, a London-based analyst at Capital Economics Ltd. Jackson altered his forecast after assessing the latest inflation and economic growth data, he said in a note yesterday.

While the likelihood for a rate cut has increased, it’s hard to predict whether the reduction will happen this month or next, MPC member Anna Zielinska-Glebocka told PAP news agency on Aug. 18. Policy makers need to keep in mind the risk that the zloty will weaken amid intensifying tension in Ukraine, fellow panelist Andrzej Kazmierczak said in an Aug. 13 interview.

The currency dropped to a five-month low of 4.2336 against the euro last week as NATO accused Russia of sending troops into its neighbor. It fell 0.3 percent to 4.2146 per euro at 4:43 p.m. in Warsaw, extending this year’s loss to 1.4 percent, the fourth worst performance in emerging Europe. Three-month zloty forward-rate agreements traded 46 basis points below the three-month Warsaw Interbank Offered Rate.

“The council has a hawkish or neutral inclination and is leaning toward keeping rates on hold, at least in September,” Gautam Kalani, an economist for central and eastern Europe at Deutsche Bank AG in London, said by e-mail yesterday. “Rate cuts remain a possibility later in the year.”

‘Strong Arguments’

Growth in Poland’s $518 billion economy slowed to 3.3 percent in the second quarter from 3.4 percent in the first three months, buffeted by weakness in the euro area and the Ukraine crisis. Consumer prices fell 0.2 percent year on year in July. The purchasing managers’ index of manufacturing declined to 49 in August, HSBC and Markit Economics said, matching the median estimate in a Bloomberg survey. Levels below 50 indicate a contraction.

The central bank should “slightly adjust policy” as inflation is set to come under its 2.5 percent target “for a prolonged period,” Credit Agricole’s Borowski said. “There are no strong arguments for postponing the rate cut.”

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