Morgan Stanley Abandons Poland Rate View as Hawks Gain Credence

Updated on
  • Polish rates on hold through end of 2017: Morgan Stanley
  • Central bank taking wait-and-see approach: rate setter Hardt

Poland’s new central bankers are winning converts to the view they won’t be swayed to cut interest rates.

Morgan Stanley this week joined a majority of analysts surveyed by Bloomberg who predict policy makers will extend a 14-month run of keeping borrowing costs unchanged, marking a reversal in its outlook that rates would fall 50 basis points this year. Bets for cuts peaked late last year on speculation that central bankers picked by the Law & Justice-led lawmakers and the president would toe the party line to lower rates.

Yet while growth slowed to a two-year low in the first quarter, rate setters including Lukasz Hardt, one of eight named by the new leaders, have made clear that easing isn’t needed since the economy is poised to pick up on its own. This has quelled concern over an erosion of central bank independence and led ING Groep NV to see no change in borrowing costs through the end of next year after predicting cuts as recently as December.

“The current council would need lots of weak data to cut interest rates,” said Rafal Benecki, chief economist at ING Bank Slaski SA in Warsaw. The newness of the council “makes it more rigid than in the case of a more experienced one,” he said.

Poland’s benchmark interest rate has remained on hold at 1.5 percent since March 2015 even as a record run of deflation shows no signs of letting up, while Hungary and the European Central Bank push for monetary easing to shore up their economies and boost lending.

Cutting rates further in Poland wouldn’t stimulate demand for loans, Adam Glapinski, slated to take over as central bank governor next month, told Dziennik Gazeta Prawna in an interview last week. Jerzy Kropiwnicki, another policy maker picked by the ruling camp, said in an interview with PAP newswire on Wednesday that he supports stable interest rates and sees sees “no reason to fight deflation as long as it has no negative effects on the economy.”

The rate council “seems to genuinely place a great deal of value on being predictable and conservative,” Pasquale Diana and Min Dai, analysts at Morgan Stanley in London, wrote in a report on Tuesday. “Rate cuts elsewhere in Europe are not a good enough reason to turn dovish, particularly as the zloty is not under appreciation pressures and as the Monetary Policy Council does not think that investment is being constrained by the price of credit.”

Traders however see scope for a quarter-point reduction in Poland’s benchmark rate in the coming year, according to forward-rate agreements. That’s down from a 40 basis-point cut in November, a month after the Law & Justice party won parliamentary elections. Economists forecast a 25 basis-point easing by the end of the year, according to the median of 24 estimates compiled by Bloomberg.

The zloty fell 0.6 percent to 4.3982 per euro at 12:45 p.m. in Warsaw, extending its drop this quarter to 3.5 percent, the fourth-biggest decline among 24 emerging-market currencies.

“The market turned to price in the negative impact of a more populist government as well as more rate cuts ahead of the appointment of a new rate council,” Cristian Maggio, the head of emerging markets research at Toronto Dominion Bank in London, said on Tuesday. Maggio predicts 50 basis points in easing this year. “The recent comments show that they may seek to build credibility and not to appear politically motivated, even if inflation remains dramatically below target.”

Consumer prices fell 1.1 percent in April from a year earlier in a deflationary cycle that’s lasted 22 consecutive months. Gross domestic product expanded 3 percent in the first quarter, missing the 3.5 percent growth estimated in a Bloomberg survey.

Growth in the first three months is no signal for alarm, rate-setter Hardt said last week. Among policy makers, there seems to be a consensus to “wait-and-see” as the economy will accelerate, he said. The Law & Justice party raised concerns about the central bank’s independence with a pledge before the nomination process to pick policy makers who’ll favor more monetary easing to spur growth and allow Poland to reduce unemployment and boost wages.

“Although the soft inflation and slowing growth data would seem to support rate cuts in Poland, the resistance to easing policy is greater than ever,” Morgan Stanley’s Diana and Dai said. “With no sign of the rate council rhetoric turning more dovish, it would probably take a significant disappointment in growth in the second quarter and beyond” to trigger further cuts, they wrote.

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