Polish Rates Set Till March for Glapinski Seeing Room to Cut

  • Poland still has room for monetary easing, central banker says
  • Stable rate outlook through 2017 reinforced by inflation view

Poland, whose record-low borrowing costs are increasingly under pressure from its longest-ever run of deflation, needs to wait until March to decide if a return to monetary easing is warranted, according to central banker Adam Glapinski, one of the top candidates to succeed Marek Belka as governor next year.

“Poland still has scope to cut the benchmark,” Glapinski said in an interview Saturday in Warsaw. “At this stage, though, it’s hard to say if any reduction would at all be needed, and doubts about it will last throughout the first quarter.”

The National Bank of Poland has held fast to its promise to keep interest rates steady after ending a three-year easing cycle with a half-point cut to 1.5 percent in March. While the latest staff projections showed an outlook for slower economic growth and inflation than forecast four months ago, Belka told a news conference after a policy meeting last Wednesday that the adjustments were “minimal,” reiterating his resolve for no change in rates.

After more than a year of deflation, that view is increasingly at odds with the anticipation of further policy loosening by derivatives traders. Forward-rate agreements, contracts used to bet on interest-rate levels, show expectations for easing surged to more than a quarter point over the next six months following the ruling party’s defeat in Oct. 25 elections.

The zloty traded 0.4 percent stronger at 4.2579 against the euro at 4:30 p.m. in Warsaw, the biggest gain among 24 developing-nation currencies tracked by Bloomberg. The yield on the government’s 10-year bond was unchanged at 2.91 percent.

The change in power is a new variable for monetary policy. With Law & Justice sweeping this year’s presidential and parliamentary ballots, gaining an unprecedented outright majority in the legislature, the party gets to reshape the 10-member Monetary Policy Council to its liking. Beata Szydlo, who led Law & Justice’s parliamentary campaign as its candidate for prime minister, has said that she wants the central bank to do more to spur growth.

Glapinski is one of eight members who’ll leave the panel early next year. Andrzej Duda, who scored a surprise victory in a presidential election in May with Law & Justice’s backing, will name the next governor of the central bank by mid-2016.

Speculation Fodder

External risks to Poland’s economy, extended deflation and low commodities prices “raise rate-cut expectations and naturally attract market speculation on that possibility,” Glapinski said. The central bank will be in a better position to decide on rates in March because that’s when it will see if the economy and inflation “really disappoint, and if the new government runs up an excessive budget deficit,” he said.

October consumer prices fell in annual terms for a 16th month, prompting policy makers to delay their expectations for a turning point until December. While a year ago they predicted positive price growth in 2015, the index now isn’t forecast to return to the central bank’s target of 2.5 percent for the next two years after staying below it since December 2012.

The central bank kept its forecast for inflation to average minus 0.8 percent this year, according to the latest projection prepared by its Economic Institute. Estimates for the next two years were reduced, to 1.1 percent from 1.5 percent in 2016 and 1.5 percent from 1.6 percent in 2017. The bank also cut its prediction for economic growth for 2015-2017 and now sees it at 3.4 percent this year, 3.3 percent in 2016 and 3.5 percent in two years.

Stable, Low

The projection follows new forecasts for the euro area by the European Commission, and they both “reinforce the scenario of stable, record-low interest rates in Poland by the end of 2017,” Glapinski said.

The Commission lowered its euro-area inflation outlook for 2016 to 1 percent from 1.5 percent, and cut its growth forecast for gross domestic product to 1.8 percent from 1.9 percent. Poland sells 56 percent of its exports to the euro region.

Even so, for Glapinski the future path of Polish interest rates will be determined by “many other dynamically changing factors.” That includes U.S. plans to raise borrowing costs, possible monetary easing by the European Central Bank, the increased risk of economic slowdown in emerging markets and “political and economic shifts” by the new government in Poland, he said.

“The next Council will need to weigh several arguments to ensure that the main Polish rate’s disparity with the euro area is safely kept, supporting stable zloty,” Glapinski said.

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