Poland Declares Easing Over After Half-Point Rate Cut

Poland’s central bank announced an end to its monetary-easing cycle after policy makers cut borrowing costs more than most analysts predicted, citing a risk of prolonged deflation.

The Monetary Policy Council lowered its benchmark seven-day reference rate by 50 basis points to 1.5 percent, a record low. Eleven of 36 economists in a Bloomberg survey anticipated the move, 23 forecast a 25 basis-point reduction, while two predicted no change.

Rate setters had hesitated to join their global peers in monetary easing since they last cut borrowing costs by 50 basis points in October, in part because falling prices didn’t stall Poland’s economy. Governor Marek Belka mustered “a solid majority” of MPC members in favor of a cut after staff projections showed inflation won’t reach the bank’s 2.5 percent target through 2017, he said at news conference in Warsaw.

“Based on the projections and economic trends we can observe, I don’t see room for more cuts or expectations for more cuts,” Belka told reporters. “I said some room remained for easing and we’ve used it.”

The zloty appreciated 0.3 percent to 4.1523 per euro at 6:25 p.m. in Warsaw following Belka’s comments and the MPC’s written statement, which stated flatly that Wednesday’s meeting “concludes the monetary easing cycle.” The yield on the two-year government bond was unchanged at 1.63 percent.

‘They’re Done’

“Finito. They’re done,” Michal Dybula, chief economist at BNP Paribas SA in Warsaw, said by phone. “This is a bold step that reduces any potential willingness to ease more as the economy gets stronger.”

Objections to rate cuts were overcome by the March staff projections, which showed Poland’s deflation persisting through this year and possibly into early 2016, even as the economy continues to expand at an annual rate of 3 percent or more. That may keep inflation below the central bank’s tolerance range until 2017, Belka said.

“It was a tough decision,” Belka told reporters. “It’s rare to decide on a half-point reduction when nominal interest rates are so low.”

Stand Apart

An important consideration was to avoid breaking step with global central banks, especially in Europe, where negative rates and quantitative easing could trigger inflows to Polish assets, according to policy maker Elzbieta Chojna-Duch.

“We didn’t want to stand apart in a dramatic way in terms of monetary policy,” Chojna-Duch told reporters at the news conference.

Polish policy makers have missed their 2.5 percent inflation target for more than two years. Price growth dropped below zero in July, starting the country’s longest stretch of deflation since the statistics office started publishing monthly data in the 1980s.

“We wouldn’t take the MPC’s statement as a cast-iron guarantee that interest rates will no longer be lowered,” William Jackson, a London-based economist at Capital Economics Inc., said in an e-mailed note. While predicting borrowing costs won’t change for two years, he said any movement is “more likely to be down than up.”

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