Poland Extends Rate Pause as Greece and China Wallop Zloty

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Poland’s central bank left its main interest rate at a record low for a fourth month as the zloty slumped to the weakest level since January amid concern Greece will exit the euro region and China’s deepening market sell-off.

The Monetary Policy Council, led by Governor Marek Belka, kept the seven-day reference rate at 1.5 percent on Wednesday, as predicted by all of 35 economists surveyed by Bloomberg.

Policy makers have drawn a curtain on a three-year period of falling borrowing costs on the expectation that Poland’s economic upswing will stabilize and help consumer prices recover from their longest bout of deflation. As Greece prepares for last-ditch talks with creditors to avoid financial collapse, investors are selling eastern European assets including the zloty, the region’s most-liquid currency.

“The expected stable economic growth, amid recovery in the euro area and a good situation in the domestic labor market, reduce the risk of inflation remaining below the target in the medium term,” Belka told reporters in Warsaw.

The zloty has weakened 5.9 percent versus the euro since hitting its 2015 high in April, trading at 4.2369 at 5:07 p.m. in Warsaw, the lowest level since Jan. 29. The yield of the Poland’s 10-year bond fell nine basis points to 3.04 percent.

‘Minimal’ Exposure

Poland’s economic exposure to Greece in “minimal” and the central bank is “ready to react” to any market shocks resulting from the crisis, Belka said. The zloty’s drop has been fueled by external factors, such as Greece and China, more than domestic determinants, he said.

The European Union’s largest eastern economy, which last year doubled its pace of growth to 3.4 percent, will accelerate to 4 percent in the fourth quarter, according to the median of 16 estimates in a Bloomberg survey. The central bank’s projection increased this year’s gross domestic product growth view to 3-4.3 percent from 2.7-4.2 percent seen in March.

GDP growth was probably similar in the second quarter to the 3.6 percent clip from the first three months of the year, Belka said. “At the same time, recent incoming figures don’t indicate that economic activity will accelerate further in the coming quarters,” he said.

Consumer demand will remain the main driver of the expansion, with household incomes benefiting from falling prices and job gains that pushed unemployment to 10.4 percent in June, the lowest since January 2009. Consumer confidence reached its highest in almost seven years, according to the Central Statistical Office.

Stable, Accommodative

Polish deflation eased in May as prices fell 0.9 percent from a year earlier after a 1.1 percent drop in April. Consumer prices will drop between 1.1 and 0.4 percent this year, the bank’s latest projection showed on Wednesday.

“It does not make sense for the central bank to undertake further policy easing,” Anisha Arora, a London-based economist at 4cast, said in a note on Tuesday. “The dynamics of inflation and growth into early 2016 support extended stable, accommodative policy.”