Polish Central Bank Cuts Rate by Half-Point to Record Low

Poland’s central bank cut borrowing costs more than estimated in what economists described as a last attempt to nudge the economy away from a deflationary spiral.

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 predicted the half-point cut, 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. Opposition to easing may have been overcome by the central bank’s latest staff projections, which probably showed deflation persisting two or even three quarters longer than previously forecast, according to Grzegorz Ogonek, a Warsaw-based economist at ING Bank Slaski SA.

“We’re assuming this is the end,” Ogonek said by phone. “The Monetary Policy Council evidently decided to go for a deep cut before the economy reverses direction.’

The zloty slipped 0.2 percent to 4.1744 per euro at 2:40 p.m. in Warsaw, while the yield on the two-year government bond fell 5 basis points to 1.58 percent.

The central bank predicted inflation would average 1.1 percent on an annual basis this year in previous staff projections published in November. Most commercial banks have since revised their estimates and now see price growth below zero through at least the first half of 2015.

Prices Fall

The Finance Ministry has done likewise. After predicting inflation of 1.2 percent in 2015, it now believes consumer prices ‘‘will probably fall on average this year,’’ the ministry’s Chief Economist Ludwik Kotecki said on Feb. 25.

The 10-member Monetary Policy Council didn’t use the word ‘‘deflation” in its official statements until January, as Governor Marek Belka and other rate-setters predicted the decline in consumer prices wouldn’t be sustained or persist into 2015. In January, however, deflation deepened to 1.3 percent, more than analysts’ estimate and the 1 percent decline in December.

The three-month Warsaw Interbank Offered Rate, which commercial banks charge each other to borrow over the period, has declined 25 basis points so far this year as evidence accumulates that deflation will persist.

Policy Conundrum

The central bank has missed its 2.5 percent inflation target for more than two years and has even undershot the lower end of its tolerance range, set at 1.5 percent, for 24 months. 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.

Poland’s economy expanded 3.1 percent from a year earlier in the fourth quarter. While that’s the slowest pace in 2014, it also capped the fastest full-year expansion in three years as deflation helped increase disposable incomes and consumer confidence.

Policy makers were thus confronted with a conundrum, Belka told reporters on Feb. 4. While falling prices help boost consumption, “persistent deflation may be detrimental,” causing a textbook reaction to deflation. The governor stressed that Poland had “never experienced” deflation in its 25 years as a free-market economy and the potential negative consequences can’t be ruled out.

‘No Point’

Belka lost two rate-cut motions in November by 4-6 margins after Elzbieta Chojna-Duch, who’d never failed to back monetary easing at a previous meetings which resulted in decisions, unexpectedly sided with the Council’s hawks. At subsequent news conferences, Belka reiterated that he saw room for more rate cuts. He needs at least a 5-5 deadlock to exercise his tie-breaking vote.

“There’s no point in dragging out rate cuts as the economic outlook improves,” Michal Dybula, chief economist at BNP Paribas SA in Warsaw, said by phone before the decision. “Cutting deeply makes up for the inaction of previous months.”

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