Poland Surprises With Third Rate Cut to Fight Virus Fallout

29 May 2020, 12:02 PM IST

(Bloomberg) -- Poland unexpectedly lowered borrowing costs for the third time in three months to stem the economic damage from the coronavirus pandemic.

The National Bank of Poland reduced its benchmark interest rate to a record-low 0.1% from 0.5% on Thursday, following one percentage point of cuts in March and April. All 24 economists surveyed by Bloomberg predicted no change.

The zloty weakened on the news as the valuations of Polish banks declined. Government bonds rallied, with yields tumbling to record lows.

“The pandemic-related shock is just colossal and unprecedented, and it’s reasonable to cut as much as possible,” said Marek Drimal, an analyst at Societe Generale in London. “The NBP has done what it could on the rates front, it’s highly unlikely rates can go negative.”

Several other rate-watchers were more critical.

ING Bank Slaski’s economists, led by Rafal Benecki, said the move may end the zloty’s appreciation trend and destabilize the financial situation of commercial lenders. Bank Millennium’s chief economist Grzegorz Maliszewski said it was “difficult to understand this decision, especially as the central bank hasn’t held a news conference in two months.”

Whatever It Takes

Despite locking down early like most of eastern Europe and avoiding the much bigger death tolls in the continent’s west, the economic blow from Covid-19 is significant. While the European Union predicts the economy will shrink 4.3% this year -- the least among its 27 members -- April saw industrial production and retail sales plummet the most on record.

Central bank Governor Adam Glapinski pledged Poland “will do whatever it takes” to weather the storm and has begun one of the emerging world’s biggest quantitative-easing programs.

QE has already reached 85.4 billion zloty ($21.3 billion), more than twice the volume of regular bond auctions this year and equivalent to 3.6% of economic output. The most-dovish member of the MPC, Eryk Lon, has repeatedly called for the bond-buying to be expanded into stocks, saying such a scenario these days is “very real.”