Poland Has Room for ‘Decisive’ Rate Cuts, Osiatynski Says

By Piotr Skolimowski

Poland’s central bank has room to trim interest rates by another three quarters of a percentage point to revive the slowing economy and discourage inflows of short-term capital, monetary-policy maker Jerzy Osiatynski said.
The difference between borrowing costs in Poland and the euro area is still “very high,” even after last week’s larger-than-expected half-point cut, Osiatynski said yesterday in an interview in Warsaw. He declined to speculate on what policy makers will do at their next meeting on Nov. 5.
“Our steps should be decisive, not spread out over time, in part to prevent foreign-exchange volatility as it’s bad for the economy,” according to Osiatynski. “Once and for good is the right approach.”
The central bank’s Oct. 8 reduction in the main interest rate was the first cut since July 2013 and was twice as big as predicted in a Bloomberg survey of
economists. Policy makers are grappling with falling consumer prices, shrinking manufacturing and lower exports as Germany’s economy slows and Russia flirts with a recession because of sanctions over the Ukraine conflict.
Poland’s $518 billion economy expanded 0.6 percent from the previous three months in the second quarter, less than the 1.1 percent it grew between January and March. The Finance Ministry cut its 2015 growth forecast to 3.4 percent from 3.8 percent, citing weakness in the euro region, which buys 54 percent of Polish exports.
The economy may expand “slightly less” than 3 percent this year and growth may average 3.3 percent or 3.4 percent in 2015 “with some luck,” according to Osiatynski.

Fiscal Limitations

At the same time, the ability to spur recovery via government spending is limited as Poland has pledged to narrow next year’s budget deficit, he said. Promises by Prime Minister Ewa Kopacz this month to raise social spending don’t amount to “fiscal expansion” and are relatively modest, Osiatynski said.
“When we’re dealing with significant limitations in fiscal policy, then monetary policy is one of the few tools to use against economic weakness,” he said.
Derivatives investors are betting on almost two quarter-point rate cuts through January, with three-month forward-rate agreements trading 48 basis points below the Warsaw Interbank Offered Rate at 10:51 a.m. in Warsaw, data compiled by Bloomberg showed. The zloty lost 0.1 percent to 4.1990 per euro, extending this year’s slide to 1.1 percent.
While Osiatynski and Andrzej Bratkowski, a fellow monetary-policy maker, are pushing for significant easing, there’s a lack of consensus across the 10-person rate-setting panel.

‘Totally Mistaken’

Governor Marek Belka predicts one more cut and has called expectations for a series of reductions “totally mistaken,” according to an interview yesterday in the Gazeta Wyborcza newspaper. Adam Glapinski sees no room for more easing, while fellow rate setter Elzbieta Chojna-Duch says it’s too early to determine future moves, the PAP news service reported.
Osiatynski said he’s concerned that euro-area lenders armed with liquidity from the European Central Bank may seek investments in countries that offer higher returns, with domestic lending unlikely to rebound amid poor consumer demand.
“This is one of the risks for Poland, a country with high political stability and a relatively high rate of return,” he said. “A difference of two percentage points between Poland and the euro area is enough to encourage inflows of short-term capital here.”
Another risk is inflation, which turned negative in July for the first time since the 1980s and has undershot the bank’s target band for 19 months. Consumer prices fell 0.4 percent from a year earlier in September, according to the median estimate in a Bloomberg survey of 33 economists. The data are due tomorrow.
“Data for September will probably show deflation and based on the central bank’s forecasts we won’t reach the lower end of the inflation target for several quarters,” Osiatynski said. “If these fundamental trends hold, and nothing suggests they’ll reverse, then I believe we can cut interest rates further.”