Reuters: US Dollar Report: UPDATE 2-In turn-around, Poland starts talking about rate cuts

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UPDATE 2-In turn-around, Poland starts talking about rate cuts Aug 28th 2012, 10:35 Tue Aug 28, 2012 6:35am EDT * C.bank head says more talk of cuts than hikes * No cut likely in September-C.bank head By Karolina Slowikowska WARSAW, Aug 28 (Reuters) - Poland's central bank may start cutting interest rates much sooner than previously expected, its central bank chief signalled on Tuesday, marking a sharp policy turn-around in the face of a weakening economy. Governor Marek Belka, in his first public comments on policy in weeks, said on Tuesday he now saw prospects for rate cuts following 18-months of gradual policy tightening, although not immediately. "The bias has certainly changed compared with what we had a few months ago," Belka told radio PiN in an interview. "We now rather talk about rate cut prospects and not about some pressing need for hikes." It was only in May that the central bank last delivered a rate hike of 25 basis points to 4.75 percent, surprising markets and the government as the economy was already then showing signs of significant deterioration. The concern has been for an inflation rate running at around 4 percent, clashing with the bank's 2.5 percent target. Belka said it was unlikely the monetary policy committee would surprise markets when it next meets on Sept 4-5. Most analysts expect the bank to keep rates on hold then. Poland's growth rates have slowed as the impact of the neighbouring euro zone debt crisis has hit the economy, and Prime Minister Donald Tusk has flagged a stimulus programme for September. "Today is not a good time. Our main export markets are stagnating, exporters are bombarded by bad news. All global demand factors are suggesting that the economy cannot be not slowing," Belka said. He expected growth rates to have slowed to 2.9 percent year-on-year in the second quarter of this year from 3.5 percent in the first. Second-quarter GDP data will be released on Thursday. Some economists believe Belka's forecast is too optimistic. BNP Paribas economist Michal Dybula even talks of the possibility of a technical recession in early 2013, while a source close to the government recently told Reuters that growth could weaken below 1 percent at the start of next year. Belka's remarks on Tuesday prompted forward rate agreements to start pricing in a rate cut as soon as in October with just a little probability of a cut seen next week. BANK DIVISIONS The bank's surprise May hike was criticised by a number of analysts and economists as being wrong-footed given the state of the economy. But there are divisions in the bank. Policymaker Andrzej Kazmierczak told Reuters on Monday that inflation is too high for the bank to consider cuts while his colleague Elzbieta Chojna-Duch said the 2.5 percent inflation target is too strict and should be changed. The tighter policy bias, meanwhile, has helped underpin the zloty, which has firmed almost 10 percent so far this year, additionally weighing on an economy already stung by a strict fiscal and monetary policy-mix. "In 2008 and 2009, the demand for the zloty collapsed, which effectively was monetary easing and that's what helped growth survive. But right now the zloty is strong and there is no fiscal or monetary easing," said Lars Christensen, chief analyst at Danske Bank. "In other words, back then, when the economy was in a free fall, the markets did the central bank's job. Now the zloty is strong, and with tight policies all over, the economy is hit by a triple whammy. The central bank simply must do its job this time around." Analysts say that after defying gravity ever since 2008 and becoming the only European Union member to avoid recession following the collapse of Lehman Brothers, Poland's economic growth miracle is now fading. Link this Share this Digg this Email Reprints

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