Poland cuts interest rates sharply to counter Ukraine, euro zone troubles

WARSAW (Reuters): Poland?s central bank cut interest rates by a deeper-than-expected 50 basis points on Wednesday, a resumption of easing forced on it by the spillover from the euro zone?s stuttering recovery and the crisis in Ukraine. The return to rate cuts in eastern Europe?s biggest economy after a 15-month pause was a response to falling industrial output and a deep drop in consumer prices, partly the result of a glut of food products that are barred from export to Russia. The bank?s Monetary Policy Council (MPC) cut the benchmark interest rate to 2.00 percent, a new record low. That was deeper than the 25 basis point cut that most analysts polled by Reuters had been predicting. ?The surprise is surely the size of the reduction in the benchmark rate,? said Adam Antoniak, economist with Polish lender Pekao. ?It seems the Council is trying to make up for lost time.? After the decision, yields on Polish 10-year benchmark bonds dropped initially by 9 basis points to 2.81 percent, an all-time low, and later rebounded slightly. The zloty was slightly weaker. A clearer picture of whether Wednesday?s cut is the start of an easing cycle or a one-off adjustment could come at 1400 GMT, when the bank is due to issue a statement and hold a news conference to explain its decision. ?It seems the bank?s rate cut prepares the ground for more easing,? said Grzegorz Ogonek, an economist at ING Bank Slaski. The bank also adjusted its deposit and lending rates, narrowing the corridor between them. The deposit rate was left unchanged at 1.0 percent, while the lending rate, called the lombard rate, was cut by 100 basis points to 3.0 percent. BUMPY RECOVERY Poland?s $508 billion economy slowed slightly in the second quarter of this year, hit by a slump in Germany, a major buyer of Polish goods and services, and tit-for-tat sanctions between Europe and Russia stemming from the crisis in Ukraine. Economic growth, at an annual 3.3 percent in the second quarter, is still higher than the average euro zone rate of 0.7 percent. Poland has been buoyed by robust growth in domestic demand and unemployment is at a four-year low. Analysts polled by Reuters before Wednesday?s decision expected the bank to cut its main rate further in the coming months, bringing it to 1.75 percent by the end of the first quarter of 2015. Markets are slightly more aggressive, pricing in a fall to 1.50 percent over the same period. Poland, which does not use the euro, is the only economy in Europe to have avoided recession after the 2008 global financial crisis. It came close though, prompting the central bank to cut rates by 225 basis points in a cycle that lasted from October 2012 to July last year. The fact that the central bank is returning to easing now is an acknowledgment that the recovery is not progressing as policy-makers had hoped -- albeit largely because of factors outside Poland?s borders. In Germany, which accounts for 25 percent of Polish exports, industrial output plunged at its steepest rate since the height of the financial crisis in August. Prolonged weakness in Germany would mean lower demand for Polish imports. A Russian embargo on imports of Western foodstuffs has hit Poland especially hard. The domestic market has been flooded with cut-price apples, for instance, because Polish farmers? usual export market is now closed off to them. Economists said the rate adjustments may be intended to give the central bank space to further cut the benchmark rate. A sharp reduction in the benchmark rate could have the knock-on effect of pushing the deposit rate below zero, a threshold that would signal Poland had entered the realm of unconventional monetary policy, something it has tried to avoid. Narrowing the corridor allows the benchmark rate to come down further without pushing the deposit rate into negative territory.

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