ECB Battle on Prices Points Way Forward for Polish Rates

By Maciej Onoszko and Piotr Skolimowski  

Photographer: Piotr Malecki/Bloomberg

Marek Belka, Poland's central bank governor, who holds the deciding vote on the... Read More

The European Central Bank’s actions to spur inflation as the euro-region economy sputters is fueling speculation that deeper interest-rate cuts are in store for Poland amid falling consumer prices.
Forward-rate agreements, used to speculate on borrowing costs, show traders betting on more than a quarter-point reduction in the Polish benchmark over the coming month even as the central bank unexpectedly lowered the main rate 50 basis points last week. A report today will probably show consumer prices dropped 0.4 percent last month, according to economist forecasts, leaving real interest rates the third highest in emerging Europe, the Middle East and Africa.
The ECB cut its main refinancing rate seven times in the past three years to a record 0.05 percent last month and is starting an asset-buying program as it
struggles to boost inflation and revive the economy. While policy makers in Poland have ruled out unconventional measures, two-year note yields at the lowest relative to similar-maturity German debt since 2007 signal prospects for deeper reductions.
“Poland still has high real interest rates compared with the euro zone and most of its emerging-market peers,” Maarten-Jan Bakkum, an emerging-market strategist at ING Groep NV in The Hague, said by e-mail yesterday. If the ECB moves to “outright quantitative easing, the Polish central bank will find it easier to move rates lower,” he said.

Worst Performer

The zloty weakened 0.1 percent to 4.2074 per euro at 10:07 a.m. in Warsaw, declining for a fifth day. The currency has lost 1.2 percent since June, the worst performance after the ruble among 24 emerging-market currencies tracked by Bloomberg.
Polish policy makers cut their key rate to a record 2 percent last week. While rate setter Adam Glapinski and Jan Winiecki signal there’s no need for more cuts, Andrzej Bratkowski and Jerzy Osiatynski are pushing for as much as 75 basis points in a series of reductions.

‘Dovish Turn’

Governor Marek Belka, who holds the deciding vote on the 10-person rate-setting panel in case of a tie, said he expects reductions if any will have to be completed this year. Elzbieta Chojna-Duch said she believed it was too early to determine future steps.
“The overall balance of the Monetary Policy Council has taken a more dovish turn, but we still believe markets are pricing too much easing,” Anders Svendsen, a Copenhagen-based economist at Nordea Bank AB, wrote in a report yesterday. “We have no more rate cuts in our forecast, but will consider adding one during the month if data surprise on the weak side.”
One-month forward-rate agreements traded 31 basis points below the Warsaw Interbank Offered Rate yesterday, indicating scope for at least a quarter-point cut at the rate panel’s next meeting on Nov. 5.
“The Monetary Policy Council is feeling more comfortable on easing rates after the markets already priced in further cuts,” Luis Costa, the chief strategist for eastern Europe, the Middle East and Africa at Citigroup Inc. in London, said by e-mail yesterday. “I don’t think they’ll stop here.”