Don’t Bet on Polish Rates to Rise as Politics and Economy Align

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Economics and politics are aligning to keep Polish interest rates at 1.5 percent, or even lower, for longer.

The National Bank of Poland just revised its projection for this year’s deflation to 0.8 percent from 0.5 percent, while the opposition Law & Justice party, which polls show winning October’s general election, wants a more “active” central bank to support growth. With the next Monetary Policy Council set to be picked by lawmakers by February, prospective candidates to the panel are already sounding dovish.

A benign global inflation environment should allow the central bank to do more to support the economy, Alojzy Nowak and Jerzy Zyzynski, economists allied to Law & Justice and potential future MPC members, said in separate interviews last week. That jars with comments this month from Governor Marek Belka, who said an economy forecast to grow 3.4 percent next year with 1.5 percent inflation doesn’t need more stimulus.

“Irrespective of who wins, the new government will seek to pick those who support its economic growth policies to the next MPC,” Michal Burek, a Warsaw-based economist at Raiffeisen Polbank SA, said by phone from Warsaw on Friday. “The rate council will be more dovish, although it’ll probably stick to an unwritten rule of keeping real rates positive.”

Spare Capacity

Poland’s real rates, or the gap between the MPC’s 1.5 percent benchmark and the latest deflation figure, stood at 2.3 percent as consumer prices fell for a 12th month in June. That’s the highest level in the 28-nation European Union after Romania and Cyprus, according to data compiled by Bloomberg.

Derivative traders are preparing for a more accommodative stance from Polish policy makers, erasing bets in the past month for more than a quarter point increase, according to forward-rate agreements used to hedge changes in borrowing costs over the next 12 months. The zloty was little changed against the euro at 8:39 a.m. in Warsaw after appreciating for the previous seven days, the longest rally in two years.

“With global commodity prices likely to remain low, Chinese deflation persisting and spare capacity in European labor markets, Poland should be still importing disinflation” next year, Koon Chow, a senior macro and foreign-exchange strategist at Union Bancaire Privee in London, said by e-mail on Friday. This should allow the MPC to keep borrowing costs unchanged for “much of” 2016, while it’s not clear “if politics will have a directional impact on rates,” he said.

Canada cut interest rates on July 15, while economists predict Hungary and New Zealand will do likewise this week.

Faster Growth

Law & Justice has promised to accelerate economic growth from about 3.5 percent over the last five quarters to curb unemployment. Beata Szydlo, the party’s candidate for prime minister, said this month she wants the central bank to do more to spur growth, including a loan program for companies.

“Record-low rates may be needed for much longer as 3 percent growth is well below what Poland really needs,” according to MPC candidate Zyzynski, a professor at Warsaw University, said in an interview. “Poland should keep low borrowing costs to stimulate and maintain investment in the real economy.”

While respecting the central bank’s independence from the government, the MPC should also take into account policies to “rejuvenate the economy and curb unemployment,” Nowak, who also works at the Warsaw University, told Bloomberg last week.

Dovish Sounds

Existing MPC members, who can’t run for another six-year term, are also starting to soften their stance. Andrzej Kazmierczak said on July 16 that Poland could keep rates unchanged through 2017, while Jerzy Osiatynski told PAP newswire that while it’s “safest” to keep borrowing costs on hold, there may be room for up to 50 basis points in cuts.

For months the MPC has resisted further easing, even as price growth has been below the central bank’s 2.5 percent target since December 2012, with Belka repeatedly saying that present rate levels ensure “balanced” economic development.

The next parliament will vote in six new members of the 10-member monetary authority. Andrzej Duda, the incoming president, will appoint a further two panelists and pick Belka’s successor when his term ends next June.

“Rate hikes are miles away since there is no inflation in sight and the new MPC may be even more dovish,” mBank SA economists led by Ernest Pytlarczyk said in a note July 17.