Poland’s quest to raise rates meets economy running on fumes

Bloomberg

Poland’s central bank has its credibility increasingly on the line after gambling that economic growth is strong enough to commit to tightening as its next move.
While the 10-member Monetary Policy Council kept its benchmark interest rate at a record low of 1.5 percent on Wednesday, in line with the predictions of all 30 analysts surveyed by Bloomberg, Citigroup Inc. and Bank Zachodni WBK SA say the National Bank of Poland has some backtracking to do. Governor Adam Glapinski and two other central bankers will comment on the decision at a 4 p.m. news conference in Warsaw after policy makers review new staff projections for inflation and the economy.
“The decision is quite obvious, but the meeting will be much more interesting than in the past months, and it’s because of the fresh projection,” said Piotr Bielski, an economist in Warsaw at Bank Zachodni, the third-biggest Polish lender. “Policy makers expected a better economic performance. Reality turned out to be less optimistic, and together with the new projection, it may lead to speculation that the council may become more dovish.”
Much of the intrigue surrounding the meeting hinges on deteriorating prospects for the European Union’s biggest eastern economy, with the updated projections likely to show slower gains in gross domestic product and an acceleration in price growth. While Glapinski had enough confidence in the outlook to reiterate last month that the central bank is moving closer to its first rate increase since 2012, he pushed back the timeline for policy tightening into early 2018.

ON PAUSE
Derivatives traders have already scaled back their wagers on changes in monetary policy, which has been on pause since easing ended in March 2015. Zloty forward-rate agreements, an indication of rate expectations, now show no moves over the next 12 months. The Polish currency is the second-worst performer this year in developing Europe with a drop of 2 percent against the euro.
Central to Glapinski’s stance since he took over as governor five months ago has been his view that economic growth will remain so robust that it warrants higher borrowing costs. Even so, the last staff projections released in July showed lower forecasts for inflation and GDP through 2018, with the economy predicted to expand 3.2 percent in 2016 and 3.5 percent the following year.
While analysts see a growing risk that
the economy will rise slower than 3 percent in 2016, missing a level the central bank
estimates as the nation’s potential growth rate, Glapinski has stood by his more
upbeat assessment. The governor last
week said “a continuation of the current processes” in the economy won’t trigger a rate increase in 2017.