Bloomberg News

Polish Rate-Cut Chances Grow After Inflation Slows

January 15, 2013

Poland’s slowing inflation raises the chances that the central bank will forgo a planned pause in monetary easing and reduce interest rates for a fourth month in February to boost economic growth, said policy makers in Warsaw.

Consumer-price growth, which had exceeded the bank’s 2.5 percent since September 2010 eased to 2.4 percent in December, compared with 2.8 percent in November, the statistics office in Warsaw said yesterday. The data mean the central bank should continue its easing cycle, Anna Zielinska-Glebocka and Elzbieta Chojna-Duch of the rate-setting Monetary Policy Council were cited as saying by PAP news service and Reuters, respectively.

Poland’s central bank was the only one in the European Union to raise rates last year. Narodowy Bank Polski Governor Marek Belka indicated last week the central bank may pause from further rate cuts after it reduced the benchmark a total of 75 basis points over three months to 4 percent.

Inflation “will slow even further in coming months, heading below 1.5 percent and boosting pressure on the central bank to cut rates,” Piotr Bujak, an economist at Nordea Bank (NDA) in Warsaw, said by phone. Falling prices “will trigger cuts in February and again in March” and a pause in easing “will be possible only after the first quarter” when the economies of Poland and the 17-nation euro region, its main market, pick up.

The zloty was little changed against the euro, trading at 4.1135 as of 6:30 p.m. in Warsaw yesterday. The yield on the government 10-year bond was also little changed at 4.04 percent.

Slowing Growth

Poland’s economy, the largest of the eastern members of the 27-nation European Union, will expand 1.5 percent in 2013, the weakest since 2002 and down from 4.3 percent in 2011, the central bank forecasts. It grew 1.4 percent in the third quarter from a year earlier as the debt crisis and recession in the euro region crimped exports and domestic demand dropped.

Based on those forecasts, policy makers began cutting rates three months ago, a year later than the European Central Bank and five months after the Czech Republic. Russia, which left borrowing costs unchanged yesterday, dropped a phrase that money-market rates are acceptable for the near-nearest future.

Poland’s easing cycle can’t last “forever” as optimism emerges about a euro-area recovery, Belka said on Jan. 9. Economic confidence in the single-currency region jumped in December to a five-month high and beat economists’ forecast in Germany, which buys a quarter of Polish exports.

Six-month forward-rate agreements, used to speculate on official borrowing costs, traded yesterday at 64 basis points below the three-month Warsaw Interbank Offered Rate, suggesting traders expect fewer than three quarter-point rate reductions by July, down from four last week.

‘Make Believers’

“Policy makers are resisting deeper rate cuts because they still don’t believe in a sustained fall in the inflation rate below the target,” Marta Petka-Zagajewska, chief economist at Raiffeisen Bank (RBI) in Warsaw, said today by phone. “What could make them believers is the data on December industrial output, which we forecast may fall 10 percent.”

December industrial production figures, along with data on wage growth, are scheduled to be released on Jan. 18.

Industrial output less than the 6.5 percent median estimate of 22 economists in a Bloomberg survey, with employment remaining “broadly unchanged” and wages rising more than the market consensus of 2.2 percent would create conditions for rates to remain unchanged next month, according to Gergely Hudecz, an economist at Credit Suisse Group AG (CSGN) in Paris.

‘Wait-And-See Stance’

“Our base-line scenario continues to envisage that the MPC will adopt a wait-and-see stance and keep the policy rate unchanged at 4 percent at its next rate-setting meeting on Feb. 5-6, although risks to this scenario are skewed to the downside,” Hudecz wrote in a note to clients yesterday.

The central bank forecasts the inflation rate may decline to below 1.5 percent next year. The Finance Ministry made the same prediction yesterday in an e-mailed response to questions from Bloomberg News. A lack of wage pressure or increases in energy prices may cause a further decline in inflation in the coming months, the ministry said.

Chojna-Duch, who said in a Jan. 11 interview that Poland may pause its rate cuts next month, said yesterday’s inflation data boosted the chances of a reduction in February, Reuters reported. According to Zielinska-Glebocka, a pause in monetary easing will be needed, but not now, PAP quoted her as saying yesterday.

“The significant fall in inflation to below the target in December supports the dovish MPC members,” Maja Goettig, a strategist at KBC Groep NV (KBC) in Warsaw, said by phone. “If the CPI figure will be accompanied by the sharp decline in December’s industrial output, decelerating employment dynamics and slower wages growth, the odds for another 25 basis-point rate cut already in February should increase,”

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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