Jan Cienski in Warsaw -
The National Bank of Poland slashed rates by an unexpected 50 basis points on October 8, dropping the bank's benchmark rate to a record low 2%, a sign of concern that a less supportive external environment could stifle Poland's recovering economy.
The bank's rate-setting Monetary Policy Council (MPC) had been expected to cut rates, but markets were expecting a more conservative quarter-point reduction. “The 50bp cut, to 2.00%, was larger than we, the financial markets and the consensus had all expected,” wrote William Jackson, emerging markets economist with Capital Economics.
On top of that, the cut may not be the last. In a statement announcing the decision, the MPC said it “does not rule out further adjustment of monetary policy” if future data show inflation remaining below target.
During a news conference, NBP governor Marek Belka made clear that the consensus on the MPC was to concentrate rate cuts timewise, which leaves open the possibility of another interest rate reduction next month. He also noted the rate decision was not unanimous.
“Given the above arguments we expect one more rate cut by 25bps in November,” writes Piotr Kalisz of Citi Research. After that, the economy is expected to pick up steam, and inflation should track slightly higher as well.
Jackson was confused about what kind of signal the bank was trying to send with its cut. “It’s possible that the scale of today’s rate cut means that the NBP is planning to be more aggressive than anticipated. But it’s difficult to square this with the sizeable divisions on the MPC between doves and hawks. Given this, we suspect that a 50bp cut may have been a compromise solution – the hawks may have preferred a larger rate cut on the basis that it’s a one-off to a gradual, but open-ended easing cycle,” he wrote.
Poland's inflation has plummeted in recent months. After eight months it is coming in at only 0.3% – far below the central bank's target rate of within 1 percentage point of 2.5%. For July and August Poland actually fell into deflation for the first time in decades.
Very low inflation is coupled with signs of slowing growth, with industrial production slowing and analysts recalibrating their estimates for growth for the year. Most estimates now call for an expansion of about 3%.
East and West
Part of the problem is increasing worry due to conditions outside of Poland. To the west, the Eurozone, Poland's largest export market, has seen growth stall and there are worries of a third recession since the onset of the global economic crisis. To the east, Russia has imposed sanctions on some imports, hitting Polish agricultural products. The severe in recession in Ukraine is also harming Polish business.
The cut will likely weaken the zloty, at least in the short term – the Polish currency lost ground against both the dollar and the euro in trading on October 8, falling by about 0.2%. That should help exporters, while business will probably benefit from low interest rates, which could spur investment, says Malgorzata Starczewska-Krzysztoszek, chief economist for Lewiatan, the Polish employers confederation. Easier access to cheap credit could also help boost domestic consumption.
“The key point is that irrespective of whether interest rates are lowered further or not, monetary policy will remain extremely loose in order to support the economy,” says Jackson.
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