Poland Keeps Rate at Record Low as New Policy Council Forms

  • Council to meet first time in full new configuration in March
  • New policy makers may resume monetary easing, derivatives show

Poland left its benchmark interest rate at a record low after economic growth accelerated to a four-year high, prices fell for an 18th month, and the central bank continued with the scheduled replacement of most of its decision-making board.

The Monetary Policy Council, led by Governor Marek Belka, kept the seven-day reference rate at 1.5 percent on Wednesday, matching the predictions of all 36 economists in a Bloomberg survey. Belka said the meeting, which included three new appointees to the 10-member panel, went “unexpectedly well” and that he didn’t notice any movement in the council’s “pendulum” to signal more appetite to either increase or reduce rates.

While the council has kept the cost of borrowing unchanged since March of last year, Polish monetary policy is now facing both fiscal changes advocated by the three-month old Law & Justice government as well as the expiring terms of eight of the 10-member rate-setting board. This coincides with an 18-month bout of falling prices and Belka, whose six-year term ends in June, said the bank’s inflation projection next month will lag its previous forecast.

“I don’t expect the MPC to increase interest rates,” Belka told reporters in Warsaw. “I don’t see any prospects for the decrease of borrowing costs either.”

Five more panelists will join the MPC for its next policy meeting on March 10-11. All the new members are set to be appointed by either the ruling Law & Justice Party, which took control of Poland’s two houses of parliament after October elections, or by former party member President Andrzej Duda. The process, while scheduled for this year, has raised concerns about the central bank’s independence after Law & Justice revamped the constitutional court and public broadcaster in changes that some European Union governments criticized as undermining democratic checks and balances.

Mixed Outlook

The zloty traded 0.4 percent weaker at 4.4232 to the euro at 4:41 p.m. after the first-ever sovereign downgrade by Standard & Poor’s last month spurred a selloff that sent the currency to a four-year low above 4.50 last month. With the European Central Bank and other regulators considering further easing around the globe, the new composition of Poland’s council is fueling bets that new policy makers may be willing to support the government’s push to speed growth by lowering rates.

Six-month forward-rate agreements, an indication of investors’ rate expectations, traded 27 basis points below the Warsaw Interbank Offered Rate on Wednesday. At the same time, investors have reduced expectations for a cut next month, when policy makers will review the bank’s economic forecasts, following comments by incoming policy makers indicating they favor stable rates in the short term.

“Policy may be reconsidered in six months,” Grazyna Ancyparowicz, a professor at the Katowice School of Economics who has yet to be sworn in to the council by the lower house of parliament, said in January. “The government’s bill granting families 500 zloty ($124) per child and other government plans will generate inflation pressure, so there are no grounds to cut rates now.”

Easing Agenda

The measures may help boost economic growth, which Deputy Development Minister Jerzy Kwiecinski said could accelerate to 4 percent this year, from 3.6 percent in 2015. Still, despite falling consumer prices, the central bank has argued against resuming easing after last cutting rates in March. According to policy maker Jerzy Osiatynski, prices may continue to fall until the third quarter.

Belka said he was “wrong” to predict that price growth would return quickly. However, Polish companies are still not feeling any negative affects from the falling prices, he said.

“We think that it is too early to say further monetary easing is off the agenda,” Bank Zachodni WBK economists, led by Maciej Reluga, said in a note. “If the zloty trims most of its recent losses, if the chances of further ECB policy easing increase, and if Polish inflation keeps surprising on the downside, the new MPC may change its bias towards more dovish.”

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