Why Market Doesn't Take Polish Central Bank's `No' as Answer

  • Traders, economists see monetary easing after year-long pause
  • Central bankers favoring rate stability, don't rule out change

The Polish central bank’s insistence that it won’t tinker with borrowing costs is failing to dent market confidence that a year-long rate pause will end sooner rather than later.

With four central bankers on Wednesday saying a cut would be inadvisable, unhelpful in stimulating the economy, or both, that view is still not resonating with traders, who continue to bet on additional easing. Banks from Morgan Stanley to Credit Agricole SA also see lower rates in the coming months, according to a Bloomberg survey. Erste Group Bank AG is pinning its outlook for easing later this year on comments last week by one new member of the Monetary Policy Council, Eryk Lon, who said a slowdown among Poland’s main trading partners may be enough to trigger a decrease in rates.

“Poland remains a question mark,” Erste analysts including Juraj Kotian said in a note. “Although new MPC members seem surprisingly hawkish, a recent comment from MPC member Lon reinforces the chance that the MPC could show its dovish bias later this year, if inflation and growth data disappoint.”

Cracking the central bank’s resolve won’t be without precedent in a region where Hungarian policy makers just backed away from a pledge to keep their benchmark unchanged through the end of next year. The European Central Bank’s record stimulus and the grim outlook for Poland’s deflation, already the nation’s longest and deepest, aren’t making things easier.

Comments by policy makers since their meeting less than two weeks ago have barely moved the needle for derivatives traders. Six-month forward-rate agreements, an indication of rate expectations, traded 19 basis points below the Warsaw Interbank Offered Rate on Wednesday, down six basis points since the central bank held its benchmark at 1.5 percent on March 11. The zloty is the second-best performer against the euro in the past month among its peers in developing Europe with a 2.5 percent gain.

As the National Bank of Poland completes a transition that will see all but one member leave the 10-person policy board this year, it hasn’t rejected easing outright. Governor Marek Belka, whose term ends in June, said after the last meeting that he could “rule out neither cuts nor increases.”

Under Belka, the central bank reduced its benchmark by 325 basis points over almost three years to a record, marking the longest easing cycle in Poland’s modern history. That’s helped drive economic growth to 3.6 percent last year from 1.6 percent in 2012.

Party Line

All eight new policy makers were appointed either by the ruling Law & Justice party, or its ally, President Andrzej Duda. The party, which swept to power in 2015, vowed before the nomination process to pick central bankers who’ll favor more monetary easing to spur growth and allow Poland to reduce unemployment and boost wages.

While most newcomers to the rate-setting council have spoken against cuts, some are hewing less closely to the line pursued by their predecessors.

Jerzy Zyzynski, a nominee approved by parliament but not yet sworn in, on Wednesday allowed for the possibility of cutting rates “a little,” cautioning that such a step wouldn’t do much to spur growth. He also pointed to the need for more effective tools to stimulate the economy than conventional monetary easing. Speaking at the same event, Lukasz Hardt was more skeptical, saying a reduction would amount to hitting the “zero lower bound.”

Replacing Government?

“In Zyzynski comments, one could see a strong intention to replace the government with the central bank in helping the economy,” ING Bank Slaski SA analysts including Rafal Benecki said in a report. “The example of other countries shows that stimulating economic growth by the central bank gives a short-term effect, while the main burden of reforms ensuring fast growth lies in government hands.”

Central bankers are also seeking to preserve policy room. Grazyna Ancyparowicz said in an e-mail last week that space for easing is important in the event of shocks. Hardt told news service PAP that the panel must remain able to respond to unexpected developments.

The youngest new central banker, Marek Chrzanowski, warned in an interview that “a change in interest rates would be an unnecessary action.” At the same time, Hardt and Jerzy Kropiwnicki see little threat from deflation, which they say is driven by factors beyond the central bank’s control, such as lower commodities and food prices.

The latest projection by the central bank’s staff, published two weeks ago, sees price declines extending through the third quarter and inflation near the 1.5 percent lower end of the target range next year. Policy makers have missed their 2.5 percent goal since December 2012.

The central bank’s “caution looks at odds with a very low inflation forecast,” said Pasquale Diana, an economist at Morgan Stanley in London.

“Soft CPI and rate cuts elsewhere will eventually make the NBP join the party and cut rates,” Diana said. “Admittedly, the risk of rates remaining on hold has risen following recent conservative rhetoric by the new MPC members.”

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