Bloomberg News

Growth Concern Damps Polish Rate-Increase Expectations

July 05, 2012

Polish central bank Governor Marek Belka’s concern that the European Union’s biggest eastern economy is slowing is damping expectations of interest rates rising this year, according to economists from London to Warsaw.

The Narodowy Bank Polski, the only one in the 27-member EU to raise borrowing costs in 2012, left its benchmark interest rate unchanged at 4.75 percent yesterday as the sovereign-debt crisis weighs on the economy. After the decision, Belka said he is “more worried about economic growth and less worried about inflation” than a month ago.

Unlike most central banks from Brazil to Turkey, Polish policy makers have kept a tightening bias as consumer prices rise at the third-fastest pace in the 27-nation EU. Belka’s focus on economic growth, set to slow to 2.7 percent this year from 4.3 percent in 2011 according to the European Commission, gave a “strong impression” of the Monetary Policy Council’s shifting priorities, according to Nomura International Plc.

“The previous certainty and vigor of argument from the MPC, and Belka in particular, had drained away,” Peter Attard Montalto, an emerging-markets economist at Nomura in London, wrote yesterday by e-mail. “There was no rallying cry for conservatism and pushing back against market pricing for cuts.”

Zloty, Bonds

The zloty traded 0.2 percent lower at 4.2208 per euro at 10 a.m. in Warsaw. The average yield on the two-year government bond was up one basis point at 4.63 percent, data compiled by Bloomberg show.

The rate-setting panel refrained from altering borrowing costs for a second month as it assesses the impact of the debt crisis in the euro area, which buys more than half of its exports.

“I wouldn’t go so far as to say that we are completely changing our outlook,” though “should that worse scenario materialize, then most probably our propensity to increase interest rates will be weaker,” Belka told a news conference in Warsaw after yesterday’s rate decision.

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 today.

New Forecasts

Belka’s emphasis on Poland’s stuttering expansion, rather than price growth, was bolstered by lower forecasts for inflation and gross domestic product in 2012-2014, released by the central bank after yesterday’s rate decision. The bank revised down its predictions for both inflation and GDP.

“In the medium term, the economic slowdown amid fiscal tightening and interest-rate increases implemented in 2011 and 2012 will be conducive to inflation returning to target” of 2.5 percent next year, the central bank said in the statement.

The bank changed this year’s forecast for economic growth to 2.3 percent to 3.6 percent from 2.2 percent to 3.8 percent. Inflation will average 3.6 percent to 4.2 percent, compared with a March projection of 3.6 percent to 4.5 percent. Price growth will slow to 2 percent to 3.4 percent in 2013, compared with an earlier 2.2 percent to 3.6 percent forecast. The bank will publish details of its Inflation and GDP Projection July 9.

‘Doesn’t Justify’

“The new inflation and GDP projection doesn’t justify monetary-policy tightening,” Piotr Bujak, chief economist at Nordea Bank Poland said yesterday in an e-mailed note. “Our forecasts are close to NBP estimates and we expect rates to remain stable the rest of the year.”

The outlook for inflation and GDP is one of several indicators the Council looks at when making its rate decision, Belka said, adding that analysis not disclosed to the public also confirm slowing inflation and weakening economic growth. He also pointed to falling commodities prices, declining inflation expectations and zloty gains “as factors helping policy makers to refrain from the tightening.”

The 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, claims price stability as its prime responsibility. Inflation has exceeded 3.5 percent, the upper end of the bank’s tolerance limit, since January 2010.

September Meeting

While the central bank may “switch into neutral stance” should economic data miss forecasts, an increase in borrowing costs can’t be ruled out, according to Jaroslaw Janecki, chief economist at the Warsaw unit of Societe Generale.

“There’s still risk of one interest rate hike by a quarter-point in September,” Janecki today said by phone. The Council will hold its next rate meeting September 4-5.

Domestic and euro-region data released since the last rate meeting suggest 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.

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 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. Inflation eased to a 15-month low of 3.6 percent in May.

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.

“Risks to the central bank’s inflation projection are skewed to the downside,” Gergely Hudecz, an economist at Credit Suisse Group AG (CSGN) in Paris, wrote in a note to clients. “The MPC will probably keep the policy rate unchanged at 4.75 percent until end-2012.”

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

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


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