Polish interest rate cuts expectations may be overdone

Poland’s economy grew 2% last year, half of 2011’s performance, prompting calls for deep interest rate cuts; but these may be premature

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The 2% advance in Polish gross domestic product (GDP) for the full 2012 was in line with expectations, but the fact that household spending growth slumped to the slowest rate since the early 1990s sparked comments that the central bank of Poland will take a dovish approach to monetary policy.

Data for the fourth quarter will be released on March 1, but analysts have made their own calculations as to how bad the slowdown was.

Neil Shearing, chief emerging markets at Capital Economics, points out that the economy started the year by advancing 3.5% year-on-year in the first quarter and that in the first three quarters of the year, growth averaged just under 2.5% year-on-year.

“Accordingly, in order for GDP to have increased by2% over 2012 as a whole, growth must have slowed to around 0.8% year-on-year in the fourth quarter,” Shearing said.

On a quarter-on-quarter basis, he believes GDP may have even contracted.

Strategists at Societe Generale expect the economy to have advanced by between 0.7% and 0.8% year-on-year in the last quarter of 2012 and to have grown by up to 0.2% on a quarterly basis.

They note the negative contribution of total consumption and investment to growth, which “could be supportive for the continuation of monetary policy easing.”


Most analysts expect the Polish central bank to cut the interest rate by a quarter of a percentage point to 3.75% at its next Monetary Policy Committee (MPC) meeting in February. But forecasts of future interest rate cuts diverge.

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“The much weaker fourth-quarter activity will likely strengthen a dovish bias at the MPC, in our view,” said Mai Doan, an analyst with Bank of America Merrill Lynch.

“We continue to expect a 25 basis points rate cut at the 6 February meeting and the policy rate to fall to 3% by the third quarter, with risks still biased on the downside.”

The preliminary Polish GDP data mostly point to risks to private consumption, and “thus are supportive for the doves,” Marcin Mrowiec, head of macroeconomic research at Bank Pekao, said.

But, Mrowiec added, the data stress the risks for the state budget for this year, as weak investments and consumption mean weak tax revenue, and value-added tax on exports – the only engine of growth in the fourth quarter – is zero.

He said the market seems to have taken this into account, as gains in T-bonds before the central bank’s news release moderated afterwards, “as though the budgetary risks outweighed the increased probability of rate cuts.”

Shearing expects interest rates to be cut by a total of 75 basis points to 3.25% by the end of the year.


Polish authorities are more inclined to look at historical data than at leading indicators and they will probably look at last year’s slowdown and argue in favour of more rate cuts, Charles Robertson, global chief economist at Renaissance Capital, said.

But “if we look forwards, we may be surprised on the upside by Polish growth in 2013,” Robertson added.

He considers Germany’s business climate index IFO – which pointed to improved sentiment in January - a “helpful guide on the future” and predicts that exports from Central and Eastern European countries “will be picking up well in early 2013” after weak data towards the end of last year.

“In addition, Poland has shifted from its pro-austerity German stance of 2011 to a more pro-expansion attitude,” Robertson said.

He forecasts growth of 2% or even 2.5% for Poland for this year, compared to market consensus estimates of around 1.6%. However, the Polish central bank “will not agree” with this bullish forecast and it will keep cutting, he said.

“We see no reason to disagree with 75 basis points rate cuts in coming months and a 25 basis points hike by year-end,” Robertson predicted.

Societe Generale’s strategist Benoit Anne also believes that expectations about Polish interest rate cuts are overdone.

“In Poland we believe the local curve has overshot the magnitude of rate cuts in the pipeline in a significant way,” he said.

“There are still 88 basis points of cuts priced in one the curve, against the 50 basis points of cuts expected under out baseline scenario.”