Poland looks past ECB stimulus to extend rate pause to one year
Poland left borrowing costs at a record low as a revamped Monetary Policy Council remained unswayed by the European Central Bank's reductions of its three key interest rates and domestic deflation that's lasted for almost two years.
The seven-day reference rate will stay at 1.5 percent, matching the predictions of all but one of the 35 economists surveyed by Bloomberg. One analyst forecast a 25 basis point-cut.
The National Bank of Poland, which last lowered borrowing costs a year ago, is diverging further from its counterparts in the euro region after a decision by the ECB on Thursday to deliver rate cuts, more bond purchases and a potential subsidy to lenders in a renewed attack against the threat of deflation. Complicating the transition for the new members of the central bank in Poland are updated projections for the economy, which probably showed a subdued inflation path even after price declines already entered a 20th month.
"It definitely wasn't a good meeting to make any decision to cut," Tomasz Kaczor, Warsaw-based chief economist at Bank Gospodarstwa Krajowego, said by phone. "The newcomers had to somehow settle into their new office, while the period of increased volatility across the markets calls for caution. Even the ECB decision from yesterday clearly requires a longer time before its impact can be properly digested." The zloty reversed its gains on Thursday after surging to a two-month high following the ECB's announcement. The Polish currency traded 0.8 percent stronger at 4.3052 versus the euro as of 12:10 p.m. in Warsaw. Six-month forward-rate agreements were 25 basis points below the Warsaw Interbank Offered Rate, indicating traders are expecting a quarter-point cut.
Under Governor Marek Belka, whose term ends in June, the central bank reduced its benchmark by 325 basis points over almost three years, marking the longest monetary easing cycle in Poland's modern history. That's helped the European Union's largest eastern economy to boost growth from 1.6 percent in 2012 to 3.6 percent last year.
"We're already seeing the negative impact of low interest rates on banking profits and any reduction of the interest rate would only worsen that effect, so a cut in the current environment wouldn't translate into any positive economic processes," Jaroslaw Janecki, chief economist at Societe Generale SA in Warsaw, said by phone. "Internal and external factors are piling up to remain cautious and to refrain from any action on rates."
Before Friday's meeting, almost all policy makers including Belka have spoken out against cutting rate cuts, pointing to the limited impact of further monetary easing on investor demand for borrowing. The economy is also set to get a boost from plans by Poland's four-month old government to deploy a new program of child benefits at an annual cost of 22 bil- lion zloty ($5.7 billion), or about 1.1 percent of gross domestic product.
Inflation is now forecast to reach 1.5 percent, or the lower end of the central bank's target range of 1.5-3.5 percent, at the end of next year, according to the central bank's last projection. The bank will publish its new forecasts on March 15. "Whatever the reason behind the deflation, it is hard to ignore the persistently low CPI and the Polish central bank may be under pressure to act, or at least to send a signal that it is ready to fulfill its mandate," said Piotr Kalisz, chief economist at Citigroup Inc.'s Polish unit.