Belka Capitulating on Rates as Polish Growth Risks Mount

Poland’s central bank is caving in on interest rates, saying mounting risks to economic growth will probably prompt cuts for the first time in 15 months.

Governor Marek Belka said yesterday that rate reductions are “very probable,” with the first coming as soon as next month. Yields on two-year Polish bonds slid to a record low following the comments, while contracts used to bet on borrowing costs showed more than two quarter-point cuts over the next three months, the first time this has occurred since January 2013, according to data compiled by Bloomberg.

As recently as July, Belka said the current level of rates ensures “balanced” growth. That’s changed as inflation fell below zero for the first time since at least the 1980s, while a trade war between Russia and the European Union over Ukraine as well as stalled growth in the euro region raised concern over a deepening economic slowdown.

“They are giving in on their long-held position,” Daniel Hewitt, a senior emerging-markets economist at Barclays Plc in London, said by e-mail yesterday. The bank will cut rates next month “unless the economy somehow turns around,” with improvement looking “most unlikely,” he said.

The National Bank of Poland kept its benchmark at a record low of 2.5 percent yesterday, as predicted by 29 of 36 economists surveyed by Bloomberg. Six economists forecast a quarter-point cut and one predicted a 50 basis-point reduction.

Future Cuts

Policy makers “will begin to adjust monetary policy” if data continue to point to slowing economic and price growth, the central bank said in a statement published after the decision.

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. Consumer prices fell 0.2 percent year on year in July. The purchasing managers’ index of manufacturing declined for the sixth month in August, HSBC and Markit Economics said.

Belka is probably in the minority of the 10-member panel in seeking to reduce interest rates, according to Peter Attard Montalto, an economist at Nomura International Plc in London.

“If Marek Belka was in the minority this time, he may be again at the next meeting,” Montalto said in a note yesterday. “As such, the likelihood of rates being unchanged in October is in our view very high.”

New Sanctions

The central bank may refrain from cutting rates only if a “strong risk-off” sentiment weakens emerging-market currencies, Lukasz Witkowski, a money manager at Warsaw-based mutual fund PKO TFI SA, who helps oversee 15.6 billion zloty ($4.9 billion) in assets, said by e-mail yesterday.

Russia banned food imports from EU countries in August in retribution for sanctions imposed by the bloc and the U.S. A new round of penalties is planned after the EU warned Russia that its expanding support of the rebels in eastern Ukraine would have consequences.

The zloty fell 0.1 percent to 4.1991 per euro at 10:33 a.m. in Warsaw, extending its loss this year to 1.1 percent. The yield on Poland’s two-year zloty government bond fell one basis point to an all-time low of 2.12 percent after sliding eight basis points yesterday.

The yield on 10-year bonds dropped three basis points to a record 2.98 percent, curbing the spread over similar German bunds to 202 basis points, the lowest in 15 months. Three-month zloty forward-rate agreements fell 56 basis points below the three-month Warsaw Interbank Offered Rate.

It’s “highly probable” the panel will lower rates in October and again in November, Radoslaw Cholewinski, a fund manager at Warsaw-based mutual fund Pioneer Pekao TFI SA with 16.3 billion zloty in assets, said by e-mail yesterday. “The council made it clear what its next moves will be.”

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