Europe's Lone Rate Hawk Nudged Back Toward Haven Status by ECB

  • Zloty gains as Poland's policy may diverge from neighbors
  • Country has come full circle after S&P downgrade in January

The European Central Bank’s decision to boost monetary stimulus is set to make Poland a magnet for investors seeking a haven from negative interest rates.

QuickTake Poland’s Populist Turn

The zloty surged to a two-month high after the ECB cut all its interest rates and expanded its monthly bond purchases. A flood of cheap euros may benefit the Polish currency more than its peers in Hungary or the Czech Republic as Warsaw stands apart from its neighbors in resisting rate cuts, according to strategists from Deutsche Bank AG to Rabobank International. Polish policy makers meet to decide interest rates on Friday.

Poland is on course to mend its reputation as the safest market in its region after an unexpected credit-rating downgrade by Standard & Poor’s in January drove investors away from zloty-denominated assets. Since then, the currency has rebounded 4.5 percent as investors trying to escape negative rates in the euro zone found a cushion in Polish yields paying almost three percent.

“The Hungarians are evidently worried about a strengthening of the forint, while the Czechs are deliberately intervening to prevent the koruna from appreciating,” Piotr Matys, a foreign-exchange strategist at Rabobank in London, said by email after the ECB decision. “Unless the Polish central bank does something tomorrow, it will be the only central bank in the region that doesn’t mind a stronger currency.”

The ECB’s 25-member Governing Council, meeting in Frankfurt on Thursday, cut the rate on cash parked overnight by banks by 10 basis points to minus 0.4 percent, and lowered its benchmark rate to zero. Bond purchases were raised to 80 billion euros ($87 billion) a month, starting in April, and corporate bonds will now be eligible. A new series of long-term loans to banks will be launched.

The ECB’s latest steps increase pressure on policy makers in Poland, Hungary and the Czech Republic, which send the majority of their exports to the euro area, to consider rate cuts as a means of retaining their competitiveness.

“The Polish central bank is less likely to cut rates than Hungary, for example, and real rates are already higher than Hungary,” said Gautam Kalani, a strategist at Deutsche Bank in London who said he expects the zloty to strengthen to 4.25 per euro. “With an ECB rate cut, we could see the zloty benefiting more from the carry-trade angle than the forint.”

After holding its benchmark rate at 1.35 percent since July, the National Bank of Hungary opened the door for potential reductions as inflation slowed below its target and the strength of the forint, the best-performing currency in emerging Europe this year, made its products more expensive in euros. Investors in interest-rate derivatives have been increasing bets on negative borrowing costs in the Czech Republic, even as policy makers repeatedly buy foreign currency to defend their Swiss-style cap on Koruna’s gains.

Policy Divergence

In Poland, rate-cut expectations fueled by the arrival of the big-spending Law & Justice party government in October last year have eased. Central-bank officials selected by the new regime have reaffirmed their commitment to keeping the borrowing costs at current levels.

Lukasz Hardt, appointed this year to the Monetary Policy Council, said last month rate setters should be forward-looking in their decisions to prevent policy mistakes. Eugeniusz Gatnar, another new member, said earlier in February that record-low borrowing costs have served the country well and no change is warranted. Jerzy Kropiwnicki said he wouldn’t rush to to change policy as the MPC had no influence on deflation and his colleague Eryk Lon said easing wouldn’t have a “significant impact” on the real economy.

The zloty surged as much as 0.8 percent to 4.2871 per euro after the ECB decision, strengthening for a third day. The benchmark equity gauge in Warsaw rose 1.2 percent, extending this year’s gain. Yields on the government’s 10-year notes fell four basis points to 2.87 percent.

“Poland’s central bank is supporting the zloty by saying it won’t cut rates for now,” Ernest Pytlarczyk, chief economist at Commerzbank AG’s Polish unit, said by e-mail after the ECB decision. He expects the zloty to “strengthen slightly” in the coming days and maintained his bullish call on 10-year zloty bonds.“It is still unwise to bet against the ECB.”

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