Traders Challenge Belka to Cut Polish Rates as Deflation Weighs

  • Forward-rate agreements show Poland to lower benchmark in 2016
  • Slowdown and external price shocks may spur cut, analysts say
Photographer: Akos Stiller/Bloomberg

Polish central bank Governor Marek Belka will go back on his pledge to keep interest rates on hold before his term ends in mid-2016, according to derivatives traders.

Forward-rate agreements, which are used to speculate on borrowing costs, are showing scope for more than a quarter-point reduction in interest rates over the next nine months. That’s the biggest bet on monetary easing since March, when Poland’s central bank last reduced its key rate to a record 1.5 percent and Belka said he’s done with cuts.

Spread between 9x12-month Zloty Forward-Rate Agreements and 3-month Warsaw Interbank Offered Rate.

Belka reiterated his stance at a news conference on Tuesday, arguing that price growth will eventually pick up even as deflation deepened in September, extending the period of falling prices to 15 months. Poland’s economy is balanced and growing at moderate pace, while the negative effects sometimes associated with extended periods of deflation aren’t hurting the country, he said.

“If growth slows in early 2016, then another cut is likely,” Nigel Rendell, a senior emerging-markets analyst at Medley Global Advisors LLC in London, said on Tuesday. “The Polish central bank has become GDP- rather than an inflation-targeting” institution.

A decline in consumer prices deepened to 0.8 percent from a year earlier in September, according to a flash estimate by the statistics office. Other economic indicators, including retail sales and manufacturing data, signaled that the European Union’s largest eastern economy will keep growing at about the same pace it did in the first half of this year.

The Monetary Policy Council, led by Belka, kept the seven-day reference rate unchanged on Tuesday, matching the predictions of all 36 economists surveyed by Bloomberg.
Eight members of the 10-person committee will end their term by January, a development cited by the outgoing policy makers as a main reason why rates shouldn’t be changed this year. Belka’s six-year tenure ends in mid-2016.

‘Deflationary Shock’

Nine-month zloty forward-rate agreements fell 29 basis points below the Warsaw Interbank Offered Rate this week. They traded 25 basis points below the rate at 10:46 a.m. in Warsaw on Wednesday, signaling bets for a quarter-point cut in interest rates by the middle of 2016. The zloty was up 0.3 percent to 4.2274 per euro, the strongest level this month.

Poland may have to reduce rates in response to external deflationary shocks, such as a potential devaluation of the Chinese currency, according to Demetrios Efstathiou, the head of strategy for Central and Eastern Europe, Middle East and Africa at ICBC Standard Bank Plc in London.

“Markets are expecting a new deflationary shock triggered from a devaluation of the yuan, possibly some time next year,” London-based Efstathiou said by e-mail on Tuesday. “If they’re right, then Polish inflation may dip below zero again, and the central bank may have little choice but to cut again.”

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