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Financials

UPDATE 2-Poland cuts interest rates to almost zero to revive economy after pandemic

* Central bank unexpectedly cuts rates to 0.1% to support economy

* Banking stocks fall sharply

* Coronavirus death toll rises to 1,030 with 22,660 infected (Adds comment, market reaction, background)

WARSAW, May 28 (Reuters) - Poland unexpectedly cut interest rates to almost zero on Thursday to support an economy struggling with the impact of the coronavirus pandemic.

The move will help consumers and businesses but sent banking stocks sharply lower as lenders have already taken a hit from low borrowing costs and now face further pressure.

The Polish central bank cut its benchmark interest rate to 0.1% from 0.5%, meaning the cost of credit has been lowered for three months in a row by a total of 140 basis points.

“The loosening of monetary policy mitigates the negative effects of a pandemic, limiting the scale of economic activity decline and supporting households and companies’ income,” the National Bank of Poland said in a statement.

Government forecasters have predicted the economy may contract in the second quarter by 10%, and partial economic data released in recent days turned out to be weaker than expected.

Economists polled by Reuters saw the economy contracting by 9.1% in the April-June period, as a nationwide lockdown imposed in mid-March to contain the virus has hit economic activity hard.

The coronavirus toll in Poland - 22,660 infected and 1,030 dead - is much lower than in countries such as Spain and Italy and since late April the lockdown has been gradually relaxed, although Poland’s borders remain closed and schools are still shut.

The rate cut sent all banking stocks down, by as much as 6.7%.

“This will have a heavy negative effect on banks as they will be unable to cut costs further to neutralise fall in their interest income. It may deepen weaker players’ problems,” Lukasz Janczak, banking analyst at Ipopema Securities, said.

Shares of the biggest lenders PKO BP, Santander Bank Polska and Pekao SA lost 3.6%, 1% and 3.6% respectively after the move.

The Polish zloty fell 0.4% against the euro in a knee-jerk reaction, before recovering half of its losses. Benchmark 10-year Polish bond yields were down around 19 basis points at 1.176%. (Reporting by Anna Koper, Marcin Goclowski, Pawel Florkiewicz, Alicja Ptak, Alan Charlish and Anna Wlodarczak-Semczuk; Editing by Hugh Lawson and Susan Fenton)

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