Bloomberg News

Punch Bowl Taken Away by Belka Seeing Better Days: Poland Credit

July 03, 2013

Polish central bank Governor Marek Belka brought the curtain down on a nine-month cycle of interest-rate cuts, saying he sees signs the economy is exiting its worst slowdown in four years.

Six-month forward-rate agreements, derivatives used to speculate on interest rates, rose eight basis points to 2.71 percent yesterday, the most since June 20, the day after U.S. Federal Reserve Chairman Ben S. Bernanke roiled markets by indicating stimulus may be withdrawn. The extra yield on 10-year Polish bonds versus their German peers has fallen 19 basis points this week after rising 54 points in June.

“The central bank’s statement should mean they’re confident the economy has bottomed,” Viktor Szabo, who helps oversee more than $10 billion in emerging-market assets at Aberdeen Asset Management in London, said by e-mail. “But the acceleration will be slow and inflation will stay hyper-low in the coming months.”

Poland lowered its main rate by a quarter-point to 2.5 percent yesterday, bringing rate reductions since November to 2.25 percentage points as the economy lost steam. Belka said the European Union’s biggest eastern economy is “over the worst” after retail-sales and manufacturing data beat forecasts.

‘Neutral Stance’

“We’re ending this easing cycle -- we’re shifting to what could be called a neutral stance,” Belka told reporters in Warsaw yesterday. “Of course, that doesn’t rule out anything in the future, but my view is that rates should stay at their current level until at least the end of this year.”

While Polish gross domestic product advanced 0.5 percent from a year earlier between January and March, the worst performance since the first quarter of 2009, data released during the last two months point to a recovery.

Retail sales unexpectedly increased 0.5 percent in May after falling 0.2 percent the previous month as the jobless rate dropped to 13.5 percent from 14 percent. The purchasing managers’ index, a gauge of manufacturing, rose to 49.3 in June from 48 in May, beating economist forecasts as new orders grew for the first time since January 2012.

“The road to recovery is open,” Belka said at yesterdays news conference. “This is an ideal moment to settle down the market, and I think we’ve done that with today’s decision by damping speculation there will be more moves to trade on.”

Trimmed Forecasts

The central bank also trimmed its economic-growth and inflation projections for 2013-2014 yesterday. GDP will rise between 0.5 percent and 1.7 percent this year, while consumer prices will advance between 0.6 percent to 1.1 percent, it said. That compares with previous forecasts of 0.6 percent to 2 percent for GDP and 1.3 percent to 1.9 percent for inflation.

Poland’s rate cut narrowed the spread to euro-area borrowing costs to 2 percentage points. The European Central Bank will keep its main rate at a record-low 0.5 percent at its meeting today, according to 61 of 62 economists in a Bloomberg survey.

Central banks across eastern Europe have been easing monetary policy to buoy sputtering economic growth. Hungary delivered its 11th consecutive quarter-point cut June 25, while Romania lowered its benchmark for the first time in more than a year July 1. Both indicated further reductions were possible.

Poland needs to make additional rate cuts to avoid “lackluster” growth and the risk of deflation late this year or early next, according to Lars Christensen, chief emerging-markets analyst at Danske Bank A/S (DANSKE) in Copenhagen.

‘Policy Blunder’

“This shouldn’t be the end of the rate cycle,” he said yesterday by phone. “We stand by our expectation that the rate will have to go down to 2 percent at least. Postponing rate cuts further in our view is a deflationary policy blunder.”

Consumer prices rose 0.5 percent from a year earlier in May, compared with 1.7 percent in January and 3.7 percent in 2012. Policy makers target a medium-term rate of 2.5 percent, with a tolerance range of 1 percentage point either side.

The zloty has weakened as Poland eased monetary policy and the Fed’s plan to scale back bond buying should the U.S. economy improve roiled markets globally. The Polish currency lost 3.4 percent against the euro in the second quarter, its worst performance since the third quarter of 2011.

After reaching its weakest level in a year versus the common currency on June 21, the zloty rose 0.6 percent to 4.3092 yesterday.

Treasuries, Bunds

The extra yield investors demand to hold Polish dollar-denominated bonds rather than U.S. Treasuries fell two basis points to 142 yesterday, according to indexes compiled by JPMorgan Chase & Co. (JPM:US) The additional yield on Poland’s 10-year zloty bonds over German bunds was 243 points.

The cost of protecting Polish debt against non-payment using credit-default swaps fell four basis points to 95, data compiled by Bloomberg show.

With figures indicating the economy is accelerating out of its slump and consumer prices also in check, there are no more rate cuts on the cards, according to Neil Shearing, chief emerging-markets economist at Capital Economics Ltd. in London.

“The economic data are showing some signs of improvement and inflation is now close to bottoming out,” he said by e-mail. “This will mark the end of the easing cycle.”

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

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


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