Polish Monetary Policy Eased Slightly

February 25, 2009

The Bank of Poland cut its key interest rates by 25 basis points.  The main reference rate is now 4.0%, still almost a full percentage point above on-year CPI inflation of 3.1% as of January.  In combination with rate reductions of 75 basis points each on January 27 and December 23 plus one of 25 bps on November 26, cumulative rate declines add up to 200 basis points. Polish rates earlier in 2008 had been raised 25 bps each in March and June.  By comparison, the ECB’s benchmark rate after March 5th is expected to be at 1.5%, 0.4 percentage points above CPI inflation and down 275 basis points from the cyclical peak.

Poland faces the near-universal problems of an export-led slowdown in growth, with elements of restricted credit availability and elevated cost.  Unemployment is rising, wages are expanding more slowly, and inflation is decelerating and associated with greater downside than upside risks.  But like other Eastern European economies, Poland has a large current account deficit of more than 5% of GDP, had been reliant on capital inflows, and has plenty of foreign currency-denominated debt whose servicing costs are being driven higher by zloty depreciation.  The currency is down more than 30% against the dollar from a year ago.

The statement released by officials at the Bank of Poland includes revised growth and inflation forecasts that are lower than those made in October, but concern about zloty, which officials call undervalued, is constraining their scope to cut rates.  The possibility of a currency crisis, not mounting confidence in economic prospects, is why they reverted to a smaller-sized reduction now.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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