Poland Keeps Rate at Record Low With GDP Growth Resilient

Poland’s central bank left interest rates at a record low and said it may ease borrowing costs further if deflation lasts longer than forecast and slower growth persists.

The Monetary Policy Council kept the seven-day reference rate at 2 percent for a third month, as predicted by 34 of 35 economists surveyed by Bloomberg. One forecast a quarter-point cut. The bank last cut borrowing costs in October, when the benchmark was reduced by 50 basis points.

The central bank is trying to balance the risks posed by the country’s longest bout of deflation on record and slowing economic growth. The European Union’s biggest eastern economy may have decelerated “somewhat” in the fourth quarter, Governor Marek Belka told reporters, pointing also to a growing risk that inflation will miss its target if deflation lingers.

“An extended period of deflation may be an important factor that may prompt the central bank to act,” Belka said at a news conference after the decision in Warsaw. “I personally believe there’s still room to cut rates”

Derivatives investors are betting another cut is a matter of time. Three-month forward-rate agreements traded 40 basis points below the Warsaw Interbank Offered Rate today, showing the biggest expectations for monetary easing since Nov. 4. The zloty gained 0.6 percent per euro to 4.2580 per euro at 6:48 p.m. in Warsaw, the strongest this week.

Deflation, Economy

The Polish economy grew 3.4 percent last year, more than double the pace in 2013, Finance Minister Mateusz Szczurek said last week. At the same time, declines in consumer prices that began in July are the result of external factors such as falling energy and food costs, according to policy makers.

“Incoming data confirming deeper and longer-lasting deflation may convince the majority of the Council to cut,” Bank Zachodni WBK economists led by Maciej Reluga said in an e-mail after the conference. “Our base scenario is the Council will reduce the rate in March after seeing the bank’s updated inflation projection.”

Interest rates too far above those in the euro area would risk an asset bubble on the bond market and capital inflows that would boost the zloty, Belka said today. At the same time, he warned that cutting rates by too much may discourage savings and steer investors and households toward riskier behavior.

ECB Easing

The European Central Bank, whose refinancing rate is 0.05 percent, is considering quantitative easing-type policies to stem price declines. In the Czech Republic, Vladimir Tomsik, a deputy governor of the central bank, has warned the economy is “importing strong deflationary pressures” from the euro area.

While Polish manufacturing expanded for a third month in December to help power the economy, inflation has been below the central bank’s 1.5 percent-3.5 percent tolerance range for 22 months. The diverging signals have split the 10-person MPC.

On one side, rate setter Andrzej Rzonca says deflation doesn’t warrant further monetary easing because it’s mainly driven by falling food and oil prices, which are boosting consumer spending. Fellow policy maker Elzbieta Chojna-Duch said Dec. 19 that recent zloty weakness “may be seen as a substitute” for a rate cut.

‘Important Argument’

“Members who oppose cutting rates have a very important argument - it may be a factor jeopardizing financial stability in Poland,” Belka said at today’s post-meeting conference.

Other MPC members favor lowering the benchmark. Andrzej Bratkowski said Jan. 5 on his blog that the economy needs a 100 basis-point cut because economic growth probably slowed in the fourth quarter. The bank should consider lowering rates if deflation extends into “the spring,” Jerzy Hausner, his colleague, told the Wall Street Journal Dec. 15.

While rate setters at their December meeting didn’t rule out further easing, they said Poland’s economic outlook remains “relatively favorable.”

Today’s decision to leave rates unchanged is “just a pause,” according to Marsa Bobanovic, an analyst at Royal Bank of Scotland Group Plc.

“Even if new growth data surprise to the upside, we see no inflationary pressure while fuel prices keep dropping and the risk of imported deflation is rising,” Bobanovic said Jan. 12 in an e-mailed report. “We think a move by the central bank to push CPI to their target will be needed.”

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