Rate council surprises market with historic low rate cut
March 7, 2013
Central bank head Marek Belka
Poland's Monetary Policy Council delivered a surprising 50 base point cut on Wednesday putting the central bank (NBP) reference rate at the all-time low level of 3.25% as of Thursday, while most economists expected either a 25 bps cut or no-move.
March is the fifth consecutive month when the Council decided to cut interest rates. Since November interest rates have been cut by a total of 125 bps.
The council called the March cut a "conclusion" of the easing cycle, with NBP president Marek Belka telling a news conference that the council is now in the "wait-and-see" mode.
The surprise 50 bps move was delivered on concerns that inflation could stay below target mid-term, the council said.
"Considering the risk of inflation running below the NBP inflation target in the medium term, the Council decided to lower the NBP interest rates further," the council said in its statement.
According to Belka, the cut was delivered, as the new inflation projection, to be published on Monday, showed room for cuts and the council preferred to close the easing cycle as soon as possible.
"First of all we got projection which showed there is room for save reduction of rates," Belka said. "We wanted the cutting to be as condensed as possible."
Further easing could only come if actual economic data differed significantly from what the March inflation projection showed, Belka added.
The projection shows that Poland's inflation will likely hold close to the lower end of the 1.5-3.5% target range throughout projection horizon, while GDP growth has 50% chance for hitting 0.6-2.0% range in 2013, 1.4-3.7% in 2014 & 1.9-4.4% in 2015. All that, of course, under the assumption of 3.75% reference rate which was in effect when the projection was prepared.
While the decision came as total surprise, it received praise from a few analysts.
"All in all, today's decision and the statement are, in our view, fully justified," BZ WBK analysts said.
Also Erste analysts believe the move is "justified."
However, bank ING BSK still believes that the rate council will deliver one more cut, as according to bank's analysts only a round of easing is closed, not the whole cycle.
"We stick to our view assuming bottom of the easing cycle at 3%," ING BSK economist Rafal Benecki wrote in a comment. "We still think the last cut can occur in June or July."