Bloomberg News

Poland Will Probably Refrain From Raising Rates on Crisis

July 04, 2012

Poland Will Probably Refrain From Raising Rates Amid Euro Crisis

Euro symbol door handles hang from glass doors inside Poland's central bank building in Warsaw. Photographer: John Guillemin Bloomberg

Poland’s central bank, the only one in the European Union to raise borrowing costs this year, will probably refrain from increasing its benchmark-interest rate today as the euro-area debt crisis weighs on economic growth.

The Narodowy Bank Polski will keep the rate at 4.75 percent, according to all 34 economists surveyed by Bloomberg News. The bank will announce its decision after noon and hold a news conference at 4 p.m. in Warsaw.

Policy makers raised borrowing costs in May and warned last month of another increase if prospects dim for inflation slowing to their 2.5 percent target and the debt crisis fails to damp growth. Consumer prices are rising at the third-fastest pace in the 27-nation EU, even as the European Commission sees Poland’s expansion easing to 2.7 percent this year, down from 4.3 percent in 2011.

Surging food costs will probably boost Polish inflation to more than 4 percent during the summer, spurring “another wave of hawkish comments by policy makers pushing for another quarter-point hike,” Michal Dybula, an emerging market strategist at BNP Paribas in Warsaw, said by phone on June 27. “The economic slowdown and external environment will persuade them, though, to put the rate on hold this month.”

The zloty, which has increased 6.3 percent against the euro this year, rose to 4.2018 per euro at 10:07 a.m. Warsaw time, down 0.1 percent on the day.

Possible Revision

While Polish price growth eased to a 15-month low of 3.6 percent in May, the central bank may revise up its forecast to “3 percent to 3.5 percent next year, from 2.9 percent in the previous projection,” Radoslaw Bodys, chief economist at PKO Bank Polski in Warsaw, said in a note on June 29. Policy makers will review the prediction at the meeting and publish it at the end of the week, according to the bank’s press office.

The Czech central bank cut its main interest rate to a record low of 0.5 percent last week. The European Central Bank kept its benchmark interest rate at 1 percent last month, matching a record low, with President Mario Draghi saying “a few” officials had opted for a cut. The Frankfurt-based ECB will hold its next assessment tomorrow.

Poland’s central bank, which last year raised rates by a total of 1 percentage point and then kept them at the highest level since 2009 for 10 months, has reiterated that monetary policy is based on a direct inflation target. That means policy makers claim inflation control as their prime responsibility. Price growth has exceeded 3.5 percent, the upper end of the bank’s tolerance limit, since January 2010.

‘Soft Landing’

Poland’s 3.5 percent expansion in the first quarter from a year earlier showed that the economy was in a “balanced soft- landing,” strengthening the bank’s opinion that the rate rise in May took place “in the right moment and was of the right scale,” Governor Mare Belka told reporters last month. Central banker Adam Glapinski said June 11 that “a moderate economic slowdown and high inflation mean that Polish policy makers mustn’t mindlessly follow other central banks.”

Belka and Glapinski were among eight board members who voted to raise rates in May. Two policy makers voted against it, according to a breakdown of the vote published last week.

Since the previous rate meeting, domestic and euro-region data have suggested that Poland’s slowing economy is at risk of worsening. Germany, which buys a quarter of Polish exports, saw its industrial output shrink 2.2 percent in April, while its business climate index dropped to the lowest since March 2010.

Wages, Jobs

Polish job growth at companies with more than nine workers held at a two-year low in May, wages increased less than forecast and retail-sales growth rose at half the pace from a year earlier. May price growth excluding food and energy slowed to a 13-month low of 2.3 percent, while households’ inflation expectations declined in June to 3.7 percent, the lowest in 18 months.

“The whole series of statistics from the real economy is giving bankers enough room to hold off raising rates,” Wojciech Matysiak, an economist at Bank Pekao in Warsaw, said by phone on June 29. “We’re getting closer to a situation where the weak economy is trimming consumer-price growth, which is natural but wasn’t happening for quite a while.”

Economic growth will slow to 2.5 percent in the second half of 2012 from a year earlier, compared with 2.9 percent in the first six months, according to the median estimate of 27 economists surveyed by Bloomberg News. The EU’s largest eastern member expanded 4.3 percent in 2011 and will grow 2.7 percent this year, according to the European Commission.

Tough Rebound

“With more headwinds from the euro-zone crisis likely to come, as well as growing evidence of a sharp deceleration in the Polish construction sector, it is difficult to expect a rebound of the economy any time soon,” said Dybula of BNP Paribas.

Dybula withdrew his rate increase forecast on June 28, joining a group of 21 economists predicting that borrowing costs will be left unchanged this year, according to a Bloomberg News survey. Two economists expect the rate to be raised to 5 percent in the third quarter.

“As we await June and July inflation, we are sticking to our forecast for a quarter-point rate increase in September,” Jaroslaw Janecki, chief economist at the Warsaw unit of Societe Generale, said by phone on June 28.

To contact the reporters on this story: Dorota Bartyzel in Warsaw dbartyzel@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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