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Strong Zloty Underpins Half-Decade Hold on Polish Rates

Currency Gain Cements Stable Rates in Poland: Decision Day Guide

(Bloomberg) --

Emerging markets’ best-performing currency against the euro last month, the zloty, helped Poland stick to its hands-off policy on interest rates.

While central banks around the world are loosening monetary policy as economic growth slows, Poland’s expansion remains at about 4% annually. Similarly, the resurgent inflation that prompted hikes to borrowing costs in other parts of eastern Europe has eased.

Helping keep Polish prices in check, the zloty gained more than any other emerging-market currency against the euro last month. That gave ample room for the central bank to keep the benchmark unchanged at a record-low 1.5% Wednesday as expected, keeping it locked where it’s been since 2015.

Strong Zloty Underpins Half-Decade Hold on Polish Rates

Hours earlier, Romania’s central bank also stood pat, keeping its key rate at 2.5% following a bigger-than-expected dip in inflation to back within the target band. Serbia and the Czech Republic will probably follow suit on Thursday.

“The situation is such that people shouldn’t expect changes in interest rates,” said Polish central bank Governor Adam Glapinski -- a long-standing advocate of keeping borrowing costs where they are at least until his term ends in 2022.

While a worse outlook in Germany could change that stance, he said he’d warn the markets in advance of any move. Talk among the bank’s board of a hike in rates has died down, meaning a reduction is now more probable than an increase, Glapinski said.

Zloty forward-rate agreements back that position, pricing in 10 basis points of cuts in the next 12 to 15 months. There are reasons to be more cautious about the economy in the months ahead.

For one, next year’s growth is set to slow, while the effect of government expenditure around the elections it won last month is fading. There’s also likely to be less in the way of European Union funding because of how the bloc’s budget payouts are spread.

A gauge of manufacturing is already flashing a warning, plunging to the lowest since 2009.

“October’s reading suggests a rather pessimistic outlook for the quarters to come,” said Malgorzata Krzywicka, an analyst at Erste Group Bank AG. “The scale of the slowdown could be bigger than previously anticipated.”

Strong Zloty Underpins Half-Decade Hold on Polish Rates

There’s positive news too. One government initiative will ramp up the minimum wage in the years to come, buoying consumer spending.

But the central bank on Wednesday downgraded its economic-growth forecasts through 2021, while lifting the outook for inflation.

“The latest macroeconomic projection doesn’t change the current dovish rhetoric of most Monetary Policy Council members, who’ll strive to stabilize interest rates even until the end of its term in 2022,” said Grzegorz Maliszewski, chief economist at Bank Millennium SA in Warsaw.

--With assistance from Barbara Sladkowska and Andra Timu.

To contact the reporters on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net;Adrian Krajewski in Warsaw at akrajewski4@bloomberg.net

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Andrew Langley, Michael Winfrey

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