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Poland’s central bank extended its longest-ever pause in interest rates as scrutiny intensifies amid an unexpected economic-growth slowdown that’s paired with accelerating inflation.
The opposing influences have clouded the arguments for moving borrowing costs in either direction and pulled the debate away from the deliberations on a global slowdown that’s shaping policy at the U.S. Federal Reserve and the European Central Bank.
With the lack of clarity and shift of focus to domestic factors, the Monetary Policy Council in Warsaw left the benchmark unchanged at a record-low 1.5%, as expected, on Wednesday.
For three months running, the 10-member Council rejected a motion to cut rates floated most likely by a single policy maker, with at least two others indicating they’d be in favor of easing if the slowdown deepens.
Governor Adam Glapinski, who has pledged to keep rates unchanged until 2022, repeated last month that if borrowing costs did happen to change, the direction would be lower rather than higher.
“It is unlikely that the council will adjust the level of interest rates in light of an economic slowdown and the expected return of inflation below 3% in the second quarter of next year, said Monika Kurtek, chief economist at Bank Pocztowy in Warsaw. “We will observe the ‘wait and see’ approach for a long time.”
Disappointing gross domestic product growth in the third quarter -- the year-on-year figure slowed to an almost three-year low of 3.9% from 4.6% at the end of June -- triggered a spate of banks cutting their full-year growth forecasts. At the same time, consumer prices rose 2.6% from a year earlier in November, just above the central bank’s target.
The diverging data has effectively handcuffed rate setters, with inflation “remaining an obstacle to lower rates,” PKO Bank Polski SA strategists Miroslaw Budzicki and Arkadiusz Trzciolek said in a note.
Nevertheless, investors expect policy makers to at least discuss cutting rates again this week and have begun pricing in an almost full quarter-point reduction during the next 15 months.
”The market is wrong,” Glapinski said when asked about the odds of a rate cut, reiterating that he expects borrowing costs should stay on hold until the end of his term in 2022. According to the governor, Polish growth should remain relatively high, while inflation should stay near target after peaking temporarily in the first quarter of 2020.
The current drivers of the economy, including a demand impulse generated by fiscal stimulus, as well as public investments driven by the absorption of EU funds, are dying out, and private investment is insufficient to maintain growth at a solid level, according to Grzegorz Maliszewski, chief economist at Bank Millennium SA.
“One rate cut within next year, which is the market’s expectation now, seems to us a too aggressive scenario,” he said. "Especially that an economic slowdown will be accompanied by an increase of inflation.”
(Updates with comments from governor and analyst starting in sixth paragraph.)
--With assistance from Barbara Sladkowska and Piotr Bujnicki.
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