Polish central bank Governor Adam Glapinski will be under pressure to explain a surprisingly steep interest-rate cut, which triggered a zloty selloff and left some economists questioning his commitment to curbing inflation.
(Bloomberg) — Polish central bank Governor Adam Glapinski will be under pressure to explain a surprisingly steep interest-rate cut, which triggered a zloty selloff and left some economists questioning his commitment to curbing inflation.
The decision immediately took on a political dimension coming so close to a tightly contested parliamentary election on Oct. 15. It also left investors guessing at the next move, with some predicting that the easing cycle had ended as soon as it began.
The zloty extended losses in early trade after falling to the weakest level since May on Wednesday. Long-term bond yields climbed as the move fueled renewed worries about inflation, which is lingering in the double digits in the European Union’s sixth-largest economy.
Glapinski will address media at 3 p.m. in Warsaw. His press conference will “be critical in shaping future rate expectations and market sentiment more generally,” Kevin Daly and Tadas Gedminas, economists at Goldman Sachs Group Inc. in London, said in a note.
The decision to lower the benchmark rate by three quarters of a percentage point — the most since the economy was hit by the global financial crisis in 2009 — caught economists off guard after most had predicted a quarter point reduction.
The zloty may claw back some losses if Glapinski offers a signal that the outsize cut was an attempt to front-load easing and the central bank will hold off on further reductions in the coming months, Bank Pekao SA said in a note. Marek Drimal, a strategist at Societe Generale in London, sees no front-loading scenario, predicting a 50 basis-point cut — or more — next month.
Political Dimension
Glapinski is likely to point to signs of weakening in Poland’s $680 billion economy, with wages and industrial output performing worse than expected over the summer following a second-quarter contraction. The central bank said in a statement that it acted preemptively to boost flagging demand, which will bring inflation more rapidly to its 2.5% target over the medium-term.
Some central bank watchers have taken issue with the reasoning. Piotr Kalisz, chief economist at Citibank Handlowy SA, said he was becoming “concerned about the sustainability of the disinflation trend,” adding that the decision was negative for the zloty.
Read more: Poland Consensus-Busting 75-Bp Rate Cut to Hurt Bank NII: React
The Polish currency was down 0.3% to 4.5840 a euro at 10:14 a.m. in Warsaw after Wednesday’s 1.7% slump. Warsaw’s WIG20 stock index lost 0.3% after sliding 2.4% on the cut. It was the worst-performing exchange in the world on Wednesday on the back of a selloff in banking stocks.
Vague Prospects
Glapinski has become a target of attacks by the opposition over the country’s cost-of-living crisis and his close ties to the ruling Law & Justice party, which is seeking a third term in office.
The ruling party and the main opposition Civic Platform have proposed a raft of social spending ahead of the election, in which Law & Justice may struggle to secure a majority. The government last month raised its budget deficit projection for next year — and is likely to allow for temporary tax cuts on food to expire in January.
Credit Agricole SA’s economist in Warsaw, Jakub Borowski, said the decision shows that bringing inflation to the 2.5% target over the medium-term is not the primary goal of the central bank.
The decision “gives the impression that the Council wanted to significantly and quickly support the government’s economic policy despite the vague prospects of inflation returning to the target in 2025,” he wrote in a note.
–With assistance from Agnieszka Barteczko, Konrad Krasuski and Piotr Bujnicki.
(Updates with comments on zloty in sixth paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.