Warsaw presses for extended Polish easing cycle

By bne IntelliNews March 12, 2013

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Hoping to maintain pressure on the hawkish central bank to offer more stimulus to the economy, Polish Finance Minister Jan Rostowski reiterated on March 11 that the National Bank of Poland (NBP) should not halt the easing cycle.

Apparently accepting that a pause is inevitable following Governor Marek Belka's announcement on March 6 that the five-month cycle has come to an end, Rostowski told a Polish radio station that he hopes the central bank will resume lowering interest rates after what he expects will be a brief pause in April. "Personally, I hope that after a short pause, maybe one month, this policy will continue," Rostowski told the RMF FM radio station.

Belka spoke last week after announcing a greater-than-expected cut in interest rates of 50 basis points, which left the benchmark at a record low 3.25%. He added that the NBP will now watch the data, with the cautious monetary council having seen indicators such as retail sales and industrial production suggest the Polish economy may have seen a bottom in the fourth quarter of 2012.

However, with inflation dropping well below the NBP's targets, most analysts appear on the side of the finance minister in suggesting more cuts should be on the way to offer the economy a further dose of pep.

In a bid to increase the pressure on Belka, the highly-respected Rostowski commented immediately following the last cut that a pause in the cycle was not what Poland needs. He looked to follow that up by reminding the hawkish governor of what happened last year, as Belka pushed aside calls from the government for stimulus, preferring instead to implement Europe's only hike of the year in April - to 4.75% - as he eyed rampant inflation and currency risk.

The economy minister at the time accused Belka of knifing the economy in the back, in an unprecedented show of fury among senior circles in Warsaw. Unbowed, the NBP then held out through the rapid slowdown in the second half of the year until it finally offered a cut in November.

Rostowski is clearly out to try to prevent a repeat of that scenario, insisting that the NBP should have started six months earlier. "I think that our economy would be stronger today, with unemployment lower, maybe even quite significantly lower, But, as the saying goes, better late than never," the finance minister said in the interview.

The commitment of the NBP to a mode of "wait-and-see" means that monetary policy is unlikely to ease further unless the economy slips into recession. It was little coincidence that Rostowski spoke the same day that the NBP said in its latest growth forecast it now expects GDP to expand 2.6% in 2013, up from the 2.3% it predicted in November, as it kicked off the easing cycle.

"We are going to see some impact from the rate cuts toward the end of this year," Jacek Kotlowski, director at the central bank's Economic Institute, said at a news conference in Warsaw, according to Bloomberg, suggesting the country should see an additional 40bp added to growth thanks to the easing cycle. "We should see a recovery more clearly in 2014."

The NBP projection also expects a "sustained" inflation slowdown through 2015, with CPI set to fall to 1.6% this year and next, and then to 1.5% in 2015. However, despite the calls of the government and many analysts, the signs don't look good for those adverting looser policy, with even the most dovish members of the monetary council signaling they're happy following March's unexpectedly large cut.

Saying she accepts that growth will remain "relatively low" over the next couple of years, Elzbieta Chojna-Duch told PAP in an interview published on March 11 that the current level of borrowing costs is "acceptable," and that the NBP is "almost" at the end of cuts.

That said, it also seems likely that the surprise 50bp cut this month was a compromise handed by Belka to the doves on the council, in order for their agreement on ending the cycle. The governor was clearly uncomfortable with the ongoing cuts, as his failure to accurately communicate policy to the market ahead of the announcements showed. Should the relatively optimistic scenario's for the economy fail to pan out in the coming months, that unity in the NBP could fall.

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