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Poland Cuts Rates as Worst GDP Slowdown in 12 Years Looms

March 06, 2013

Poland Cuts Interest Rates as Worst Slowdown in 12 Years Looms

A visitor approaches the headquarters of Poland's central bank in Warsaw. Photographer: Bartek Sadowski/Bloomberg

Poland’s central bank cut its main interest rate by more than economists estimated to a record low as the worst economic slowdown in 12 years looms after consumer spending plunged amid Europe’s debt crisis.

The Narodowy Bank Polski lowered the benchmark seven-day reference rate by 50 basis points to 3.25 percent today. None of the 38 economists surveyed by Bloomberg predicted the move, with the median forecast a quarter-point cut.

The European Union’s largest eastern economy will expand 1.2 percent this year, the weakest pace since 2001, as domestic demand falters and a euro-area recession hampers exports, the EU forecasts. The NBP is taking a “wait-and-see”-approach after five rate reductions since November while not ruling out further easing, Governor Marek Belka said at a news conference in Warsaw today.

The reduction should be seen “as a full stop placed after a certain series of rate cuts” and the NBP prefers “to look at our stand as wait-and-see and one should take that literally,” Belka said. While further easing isn’t ruled out in the coming months, first “we’d need inflation and GDP data to differ significantly from what we see in the projection.”

The zloty pared earlier losses after Belka’s comments, weakening 0.4 percent against the euro to trade at 4.1467 at 4:31 p.m. in Warsaw. The yield on the government’s two-year bond fell 10 basis points to 3.46 percent.

‘Justified’ Aggression

“Considering the weakness of domestic demand and its outlook, I would call the move aggressive but justified,” Viktor Szabo, who helps manage $11.8 billion at Aberdeen Asset Management in London, said by e-mail. “Probably after cutting 150 basis points in a row, one might want to wait to see the full impact so I think the next inflation report could be the next good opportunity to react.”

The decision comes after Hungary’s central bank cut its main interest rate for a seventh month in February to a record low as the most indebted of the EU’s eastern members fights a recession. In the Czech Republic, policy makers are considering steps to weaken the currency as the economy remains mired in a slump even after the main rate was reduced to near zero.

Polish economic growth may slow to between 0.6 percent and 2 percent in 2013, compared with a November forecast of 0.5 percent to 2.5 percent, according to the central bank’s new projections released today. The inflation rate may range between 1.3 percent 1.9 percent this year, compared with a previously predicted 1.8 percent to 3.1 percent.

Consumption Contraction

While Poland’s economic growth slowed less than economists forecast in the fourth-quarter, private consumption contracted 1 percent, the first yearly fall since 1996, the statistics office said March 1.

Consumers, whose spending makes up 62 percent of gross domestic product, are cutting back amid rising unemployment. Layoffs by companies including Telekomunikacja Polska SA (TPS), Poland’s biggest phone company, and PZU SA, the largest insurer, helped push the jobless rate to 14.2 percent in January. That’s the highest since March 2007.

Still, industrial production unexpectedly rose 0.3 percent in January amid improving business confidence in Germany, while retail sales increased 3.1 percent from a year earlier, beating the most optimistic forecast in a Bloomberg survey.

The central bank should end its easing cycle in March as the economy is poised to exit the worst of its downturn and another rate cut could rekindle inflation down the line, Adam Glapinski, a member of the rate-setting Monetary Policy Council, said in an interview on Feb. 20.

‘Bolder Move’

“Nobody expected this after policy makers have sounded so cautious in the past few months, although the economic situation clearly called for a bolder move,” Piotr Bielski, economist at Bank Zachodni WBK SA, said by phone from Warsaw today. “That’s probably a clear signal that they are now going to end the cycle or at least pause. Doing otherwise would make the central bank look erratic.”

Finance Minister Jacek Rostowski this week called on the central bank to cut rates as borrowing costs will have a “very significant” impact on economic growth. Policy makers will end the easing cycle after reducing rates to 3.25 percent in the second quarter, the median forecast of 14 economists surveyed by Bloomberg showed before today’s reduction.

Poland, the only EU economy to avoid recession since 2008, was alone in the 27-nation bloc last year to raise borrowing costs as inflation exceeded its 2.5 percent target for more than two years. It declined to 1.7 percent in January, the lowest since August 2007.

The central bank’s “new projections will remain consistent with interest rate cuts,” Michal Dybula, an economist at BNP Paribas SA in Warsaw, said in e-mailed report yesterday. “The slump in consumer spending suggests further sharp disinflation during the remainder of the year” and borrowing costs will decline to 3 percent “by the summer.”

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

To contact the editor responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net


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