Poland looks past ECB stim­u­lus to ex­tend rate pause to one year

The Pak Banker - - COMPANIES/BOSS -

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.

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