Poland Bides Time Before Bulldozers Clear Path for Rate Hike

  • GDP growth to accelerate in 2017 after slowdown, survey shows
  • Central bank has signaled policy tightening is the next move

Poland’s central bank has misread the economy for much of this year, but time appears to be on the policy makers’ side as they prepare the ground for the country’s first interest-rate increase since 2012.

Governor Adam Glapinski has made tightening conditional on when economic expansion “will be strong enough,” and preliminary figures for the third quarter show Poland is in a deeper hole than previously thought. With detailed gross domestic product data due on Wednesday, analysts surveyed by Bloomberg remain convinced that the country’s economic blues will fade and rates will head higher in line with central bank guidance.

  • GDP will grow 2.4 percent in the fourth quarter and 3.1 percent in the following three months, the Bloomberg survey shows, compared with previous readouts of 3.1 percent and 3.5 percent, respectively
  • Expansion will pick up tempo in the second half of 2017 and make up for the slower start, the monthly poll showed
  • Poland’s rate path will need no adjustment: borrowing costs will be on hold until an increase in the first quarter of 2018, the survey predicts

The outlook is a vote of confidence in a central bank that’s often confounded the market with views increasingly out of whack with an economy dragged down by a slump in investment to the slowest growth since 2013. Poland’s government, which targeted expansion of as high as 5 percent, has mainly blamed the stumble on delays in accessing the European Union’s financial assistance. With 85 billion zloty ($20.4 billion) of EU-funded projects already approved, an uptick is just around the corner, according to ING Groep NV’s Polish unit.

“A rebound is a matter of a time lag between project approval and the moment when bulldozers enter construction sites,” Rafal Benecki, chief economist at ING Bank Slaski SA in Warsaw, said by phone. “By staying put, the Monetary Policy Council avoids getting into trouble by acting pro-cyclically.”

As recently as this month, Glapinski ruled out the risk of a slowdown below 3 percent for Poland and emphasized his belief that the “well-running” economy will pave the way for a rate increase. In July, the governor said economic growth will actually surpass the central bank’s forecast and reach 3.6 percent this year. His only regret then was that he couldn’t “somehow freeze our great economy,” allowing Poland to “keep it for longer and longer.”

Meanwhile, GDP expanded 2.5 percent from a year earlier last quarter, slipping to less than 3 percent for the first time since 2013 and missing the central bank’s estimate for the nation’s potential growth rate. The median estimates in the Bloomberg survey call for 2.9 percent growth this year, 3.3 percent in 2017 and 3.4 percent in 2018. 

Analysts slightly increased their price-growth forecasts, predicting it now at minus 0.6 percent for 2016 and 1.4 percent the following year.

Prospects ‘Intact’

“While we acknowledge a worse 2016 trajectory, we think Poland’s growth story remains intact,” Morgan Stanley economists said in a report, cutting their forecast for this year’s expansion to 2.6 percent from 3.1 percent. “It is difficult to pinpoint exactly when EU funds will flow into the economy, but we have recently seen some signs of stabilization in other central European countries -- Hungary, for example -- and we do not see why Poland should be any different.”

The central bank’s Economic Institute cut its GDP growth projection in November for a second straight time. The latest forecasts showed economic gains accelerating to 3.6 percent next year and consumer-price growth rebounding after record-long deflation to 1.3 percent, near the lower end of policy makers’ target range. 

For Glapinski, the outlook is enough to commit to tightening as the next move, with the benchmark rate on hold at 1.5 percent since March 2015.

While Poland has struggled to clear a hurdle of weak investment, concerns also linger over the government’s policies. The ruling Law & Justice party, which swept into power in 2015, has implemented measures ranging from tax increases on banks and retailers to higher social spending and lowering the retirement age. GDP data due this week will show how investment fared last quarter after dropping 4.9 percent in the April-June period.

Opposition Sabotage?

Deputy Prime Minister Mateusz Morawiecki has said that the slowdown is temporary and the economy will get a boost by the middle of next year as EU funding revives investment while a package of measures cutting red tape and easing business activity is implemented. More worryingly for investors, leading officials also blamed opposition-linked businesses and bureaucrats for the drop-off in growth.

Unruffled by economic pains, the National Bank of Poland has stood pat on borrowing costs. Policy makers have said deeper easing isn’t warranted because it would do little to unlock credit and instead threaten the zloty and further squeeze banks already under pressure by low interest rates.

The Polish currency is the second-worst performer this year in developing Europe with a drop of 3.5 percent against the euro. Zloty forward-rate agreements, an indication of rate expectations, indicate no moves over the next 12 months.

“Inflation will speed up in 2017 and interest rates should keep on rising,” Michal Dybula, chief economist at BNP Paribas SA in Warsaw, said by phone. “Poland can’t go against the tide when it comes to interest rates, without risking zloty weakening.”

— With assistance by Dorota Bartyzel

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