Poland’s central bank surprised markets by cutting its benchmarket seven-day interest rate by 50 basis points to an historic low of 1.50% at its monthly meeting on March 4.
A statement from the council pointed to falling consumer prices as the key reason for the cut, with the ECB's quantative easing programme also a factor. Poland’s CPI fell to -1.3% in January from -1.0% in December, its seventh consecutive month of deflation. Inflation has been below the NBP's target of 2.5% for 26 months.
Both the central bank and the finance ministry have revised downward their predictions for inflation. The ministry had been predicting inflation of 1.2% in 2015, but said in February that prices will probably fall on average this year.
Marek Belka, the bank’s governor, said after the announcement that there would be no more cuts in the near future, with many having expected two 25 bps rate cuts this half year. "The motivation behind a deeper than expected cut was probably a desire to stem market expectations for a rate cut cycle," Adam Antoniak, senior economist at Bank Pekao, told Reuters.
"The decision on cutting interest rates at the present meeting means an end of the monetary policy easing cycle," the bank said in a statement.
Falling global oil prices fed into a 1.3% year–on-year fall in Poland’s CPI in January, far below the bank's 2.5%+ target band, though still strong growth had reportedly disinclined some members of the rate setting council from any cuts in rates.
Poland's manufacturing sector grew strongly in February and employment is growing, on the back of 3.3% GDP growth in 2014. Poland's gross domestic product grew by 0.7% in the fourth quarter of 2014 with annual growth of 3.10%, down from 3.3% in the third quarter.
Despite the cut, Poland's rates still remain higher that in the eurozone and the US, where they are close to zero.
The cut is seen by some as making up for inaction in previous months, after the central bank opted to hold rates in January and February, after a previous bigger than expected ease of 50bps in October.
Polish stocks fell on the news, rebounding slightly before the close, with banks worst hit. The zloty also fell on the news, pushing down to record lows, down 0.3% versus the euro. The yield on the two-year government bond fell 5 basis points to 1.58%.
The NBP also cut the deposit rate by 50 basis points to 0.50%, the lombard rate to 2.50% and the rediscount rate to 1.75%.
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