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UPDATE 2-Polish, chided by premier, cuts rates to new low
March 6, 2013 / 5:26 PM / 5 years ago

UPDATE 2-Polish, chided by premier, cuts rates to new low

* Bank cuts key rate by 50 bps to 3.25 pct

* Move surprises markets, irks some economists

* Businesses welcome easier policy

By Pawel Florkiewicz and Stanislaw Skrzydelski

WARSAW, March 6 (Reuters) - Poland’s central bank closed a five-month easing cycle with a surprise half point interest rate cut on Wednesday, after government criticism that it had failed to combat a slowdown in the EU’s biggest eastern economy.

Following sharp words from Prime Minister Donald Tusk that it has been too slow in freeing up credit, the bank also slashed its inflation forecast and said this year’s best-case growth outlook was weaker than previously thought.

The decision brought the key rate to a record low of 3.25 percent, giving hope to businesses and consumers struggling against unemployment at a six-year high and an unprecedented fall in consumption at the end of last year.

“Please treat it as a full-stop at the end of a series of cuts,” central bank Governor Marek Belka told a news conference.

None of the 29 analysts polled by Reuters had predicted the half-point cut, a majority having expected a quarter-point reduction.

Several economists said the decision had shown rate setters’ fears over slowing growth and rising unemployment had trumped concerns inflation could reignite and pose risks to stability.

Some vented frustration, however, by saying board members, including Belka, had spent the last few weeks arguing the easing cycle could at least pause, catching the market off-guard.

“This is a big surprise, given the caution and end-of-cycle language being used at the last meeting,” said Peter Attard Montalto, an analyst at Nomura.

Montalto said Wednesday’s decision showed “poor credibility and disastrous communications” by the bank. “None of the recent rhetoric (among rate setters) pointed to this at all,” he added.

Finance Minister Jacek Rostowski, who led the attacks on central bank reluctance to cut borrowing costs, said the bank was now being too quick to adapt a ‘wait-and-see’ approach.

“It’s a shame, because Poland still has the highest real rates in the European Union,” he said on his Twitter account. “Why do Polish entrepreneurs have to pay more for credit than everybody else in Europe?”

Facing a lower premium for holding Polish assets, investors sold the zloty, initially knocking it 0.7 percent lower against euro. Bond yields fell by 5 to 15 basis points across the curve.

Even following Wednesday’s move, rates in Poland are the EU’s third highest after emerging members Hungary and Romania.


Fuelled by a domestic market of 38 million consumers whose living standards are still catching up with those in Western Europe, Poland has enjoyed two decades of growth and was the only EU state to avoid contraction since 2008.

But a main driver - a five-year, 20 billion euro campaign of road, stadium and other projects for the Euro 2012 soccer tournament - dried up last year, causing construction to plummet by almost a quarter and sending many builders into bankruptcy.

At the same time, Tusk’s government has cut costs in an effort to trim the budget deficit, while a recession in Poland’s main export market, the euro zone, has hit exports, triggering waves of layoffs at companies such as carmaker Fiat.

Businesses welcomed the move.

“An economic slowdown is a good time to invest, and if there is cheaper access to capital, it would be a sin not to take advantage of it,” said Eugeniusz Fengier, owner of Foster, an electronic boiler components producer.

But, following a string of recent data suggesting the economy would avoid recession and rebound in the second half of the year, the bank introduced a new note of caution.

It said growth could reach a maximum of 2 percent this year, down from a previous forecast of 2.5 percent.

It also cut its outlook on inflation to 1.3 to 1.9 percent this year, significantly lower than its previous 1.8-to-3.1 percent view and in line with the government’s insistence that it would fall far below the central bank’s 2.5 percent target.

Analysts said they now expected the bank to hold rates in the coming months. But some argued the half-point cut had come too late and it would be tough to judge the next move.

“Poland’s economy needs all the stability and predictability it can get from policymakers right now. A confusing monetary policy makes matters worse,” said Nicholas Spiro, the head of London-based Spiro Sovereign Strategy.

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