Poland should avoid cutting interest rates next month as the risk of weakening the currency and triggering capital outflows outweighs any benefit to the economy, central bank policy maker Andrzej Kazmierczak said.
“Rate cuts obviously hurt the zloty and if the current pace of depreciation continues, it could end up having a devastating impact on bond prices and investor confidence,” Kazmierczak, a member of Narodowy Bank Polski’s rate-setting panel, said June 21 in an interview in Warsaw. “If the zloty keeps weakening, I can’t imagine a rate cut in July.”
Poland’s currency last week fell the most in 19 months and bond yields jumped the most since 2008 after the U.S. Federal Reserve said it may end its asset-purchase program that had underpinned emerging-market inflows. For Kazmierczak, the Fed’s announcement wasn’t the only trigger for a selloff, since the zloty had already slumped to a one-year low after the Polish central bank’s latest quarter-point rate cut on June 5.
The reduction brought the benchmark rate to a record 2.75 percent as policy makers tried to nudge the economy from its steepest slowdown in four years. After the decision, Governor Marek Belka signaled that monetary easing may be close to an end because “we’re very near a rate level that the council would regard as appropriate.”
“The zloty selloff we’ve observed since early June can’t be explained entirely by the Fed, since continued monetary easing has narrowed the interest-rate disparity that had benefited the zloty,” Kazmierczak said. “The depreciation we’re seeing is far from harmless -- it’s dangerous when foreign investors own 200 billion zloty ($60 billion) of our bonds.”
Foreign investors held 36.1 percent of Polish zloty-denominated debt at the end of April, up from 35.1 percent at the end of 2012, according to Finance Ministry data.
The zloty rose 0.3 percent to 4.3436 per euro at 10:50 a.m. in Warsaw after declining 2.7 percent last week, its biggest weekly drop since November 2011. The yield on the five-year government bond stayed unchanged at 3.86 percent. It rose 16 basis points, or 0.16 percentage point, June 21, extending its weekly increase to 65 basis points, the biggest jump since October 2008, data compiled by Bloomberg show.
“There are fewer reasons to buy Polish bonds and sentiment is reversing,” Kazmierczak said. “That’s why the next few days will be crucial for the July rate decision. We need to take into account what’s happening on the currency market.”
Kazmierczak backed three of Poland’s five consecutive rate cuts between November and March, according to voting tallies published by the central bank. Minutes for the May and June rate meetings haven’t been released yet. Belka has the tie-breaking vote on the 10-member Monetary Policy Council and used it to reduce rates by 50 basis points in March, with Kazmierczak among those voting against.
“Kazmierczak is one of the hawks and, in fact, his support isn’t necessary for a rate cut in July,” Bank Zachodni WBK wrote today in an e-mailed note. “Nevertheless, the council will take the situation in the forex market into consideration and if the pace of zloty depreciation accelerates, it may reduce the chance of a rate cut at the next meeting.”
Growth in the European Union’s largest eastern economy has slowed as the 17-nation euro region, which buys more than half of Polish exports, remains stuck in a record-long recession. Gross domestic product, which rose 0.5 percent in January-March from a year earlier, may expand by 0.7 percent in the second quarter, while growth for 2013 will be about 1 percent, Kazmierczak said, citing the central bank’s internal forecasts.
“The economy is close to stagnation and successive forecasts show the recovery will be later and weaker,” Kazmierczak said. “We can’t count on any boost from external demand before the end of the year, while internal demand, our main hope, has disappointed.”
While the condition of the economy “provides arguments for continuing monetary easing,” the lack of a response to 200 basis points of rate cuts since November suggests that course would be ineffective, Kazmierczak said.
“Monetary easing isn’t translating into economic expansion,” Kazmierczak said. “It’s not spurring lending growth, while the negative impact of low interest rates on bank deposits is becoming evident.”
Bank deposits held by Polish households grew at a nominal rate of 7.7 percent from a year earlier in May, slowing from 8.9 percent in April, while household borrowing rose 0.9 percent, down from 2 percent in April, according to central bank data. Corporate borrowing shrank 0.2 percent in May after growing 1.4 percent in April, according to the same report.
“Demand for credit is less sensitive to price when the economy is stagnating,” Kazmierczak said. “The focus should be shifted to the possibility of a fiscal stimulus, and especially to reviving public investments.”
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