Bloomberg News

Draghi Rebound Doubt Pushing Belka Back to Easing: Poland Credit

April 08, 2013

Poland’s interest-rate setters may just be postponing the inevitable.

Central bank Governor Marek Belka signaled in March that policy makers will put a “full stop” on cuts to borrowing costs after reducing them to a record because the economy is poised for a “very gradual” recovery. That scenario may need revising after European Central Bank President Mario Draghi said on April 4 that risks to the outlook remain on the downside for the euro region, Poland’s biggest trading partner.

“Some weakness is resurfacing in the euro area and the ECB is signaling its unease,” Rafal Benecki, chief economist for Poland at ING Groep NV, said by phone from Warsaw on April 5. “That’s one of the factors that may convince the Polish central bank to cut rates again in the second quarter.”

Derivative traders are betting on rates falling by 37 basis points in three months’ time, the most since Feb. 5, according to the difference between forward-rate agreements, or FRAs, and the Warsaw interbank offered rate. The yield on two-year zloty notes fell to a record low today, narrowing the premium over similar German bonds to 297 basis points, the least in two months.

Rate Forecast

All 34 analysts surveyed by Bloomberg expect no change to Poland’s main rate, currently at 3.25 percent, when policy makers conclude a two-day meeting on April 10. Borrowing costs won’t change through the end of the year after a total of 150 basis points of reductions since November, according to a median estimate in a separate survey of 20 economists.

Still, traders of FRAs are increasingly convinced an easing of policy will resume after reports showed a contraction in manufacturing deepened last month, while retail sales fell and unemployment rose to a six-year high in February.

The FRAs suggest a quarter-point cut through June, a month before the central bank publishes its next inflation forecast. The Monetary Policy Council can wait for the report before deciding on more rate changes, Anna Zielinska-Glebocka, one of the panel’s 10 members, told Reuters on March 19.

“Markets will continue pricing much lower rates,” Dmitri Barinov, who helps manage about $2.6 billion in emerging- European debt at Union Investment Privatfonds in Frankfurt, said by e-mail on April 5. “Even if they don’t cut now, the prolonged weak set of data over months and quarters will make them lose their nerve. They will even overreact.”

Magyar Measures

While Polish monetary-policy makers are hoping for an economic rebound in the second half of the year, the Hungarian central bank last week announced steps to spur lending and tap currency reserves in a bid to end the country’s second recession in four years. Poland isn’t working on similar measures, Belka told reporters on April 4.

Belka and his fellow rate-setters were so confident that the economy would weather the euro region’s debt crisis that they unexpectedly raised borrowing costs in May 2012 to curb rises in consumer prices. Nine months later, the rate of inflation fell to 1.3 percent, below the central bank’s tolerance range of 1.5 percent to 3.5 percent.

The Finance Ministry has blamed the central bank for exacerbating the current slowdown by cutting “too little, too late,” Ludwik Kotecki, the ministry’s chief economist, told Gazeta Wyborcza in an interview last week.

The budget deficit reached 70 percent of this year’s target in the first quarter as tax revenue waned.

Stifled Growth

Poland is poised for its weakest growth in 12 years after being the only European Union economy to avoid a recession since 2009, when the government cut taxes to boost consumer spending. The moves widened the budget deficit to 7.9 percent of gross domestic product, the biggest gap since at least 1996.

Prime Minister Donald Tusk pledged to narrow the deficit as required by the EU, limiting options to stimulate the economy. The shortfall reached 3.5 percent of GDP last year.

Belka blamed the government’s spending cuts on stifling growth rather than his central bank’s policy. Fiscal cuts were “the most important factor behind the slowing of growth in 2012,” Belka said at a seminar in Warsaw last week.

The zloty strengthened 0.2 percent to 4.1492 per euro at 11:17 a.m. in Warsaw. The extra yield investors demand to hold Polish dollar-denominated bonds rather than U.S. Treasuries fell one basis point, or 0.01 percentage point, to 131, according to indexes compiled by JPMorgan Chase & Co. The additional yield on 10-year zloty bonds over German bunds fell 10 basis points to a two-month low of 232 today.

The cost of insuring Polish debt using credit-default swaps rose less than one basis point to 86, according to data compiled by Bloomberg. The swaps, which rise as perceptions of creditworthiness deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower renege.

“An interest-rate cut now won’t have a meaningful impact on the economy this year as there is normally some lag before it feeds through,” Neil Shearing, an economist at Capital Economics Ltd., said by phone from London on April 5. “It’s all baked in the cake now.”

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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