Franc-in-Waiting Needs Cut to Avoid Adverse Gains: Poland Credit
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(Bloomberg) — Is the Polish zloty the next Swiss franc? A new Danish krone?
That’s the risk for PineBridge Investments, which says Poland’s central bank must cut interest rates or face a rush of hot money inflows as Mario Draghi unleashes 1.1 trillion euros ($1.25 trillion) of monetary stimulus in the euro zone starting in March. Without lower borrowing costs, Warsaw policy makers may be confronted by deepening deflation as the zloty strengthens amid the global hunt by investors for higher yields, according to the money manager, which oversees $73 billion.
“The market is now looking for alternatives to the Swiss franc and the Danish krone,” Anders Faergemann, a London-based emerging-market fixed-income manager at PineBridge, said by phone on Jan. 27. “With Poland having a strong economy and being in a sort of a sweet spot, there is the risk that it will see flows coming in and boosting the zloty.”
Central banks worldwide are becoming more determined to talk down their exchange rates to shore up growth amid dwindling inflation. The Swiss National Bank maintained a cap on the franc against the euro for three years, and abandoned it only a week before European Central Bank President Draghi announced quantitative easing, because it would have required ever larger interventions to sustain it. Denmark spent $12 billion last week defending its peg to the euro as the common currency weakens.
Holding Rates
Poland’s rate-setting panel has kept the key interest rate at record low 2 percent for the past three months. It rejected two motions for lower rates in January, as some policy makers were waiting to gauge the ECB measures, according to minutes from their last meeting released Jan. 22.
Polish bonds and currency have rallied after Draghi announced his unprecedented bond-purchase plan. The zloty surged 2.5 percent last week, the most since 2012, while the yield on the 10-year zloty bond has fallen to a record 1.99 percent.
Economic expansion in Poland accelerated to 3.3% last year from 1.7 percent in 2013. Consumer prices have fallen for six consecutive months, sliding 1 percent in December from a year earlier, the worst deflation since the statistics office started publishing comparable data in the 1980s. The rate of price changes has been below the central bank’s tolerance range of 1.5 percent to 3.5 percent inflation for almost two years.
Policy Majority
Rate-setters “aren’t far” from forming a majority to back lower rates, Governor Marek Belka said Jan. 23. The Polish central bank’s monetary policy panel will meet Feb. 4.
Six-month forward-rate agreements are trading 62 basis points below the Warsaw Interbank Offered Rate, indicating scope for more than a half-point cut in rates over that period.
Policy makers are also gathering information on whether the zloty’s level has begun weighing on exporters, Andrzej Raczko, a member of the central bank’s management board, told Dziennik Gazeta Prawna in an interview on Jan. 26.
If Poland cuts rate, it will join a long line of central banks including India, Turkey, Switzerland and Denmark to do so this year. Singapore tweaked its main monetary policy tool on Wednesday, sending its currency to the weakest since 2010 against the dollar.
“There’s a race to zero interest rates,” Faergemann said. “If I have to say where Polish rates should be in six months’ time, I’d say lower than would have been historically imaginable.”
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To contact the reporter on this story: Maciej Onoszko in Warsaw at monoszko@bloomberg.net To contact the editors responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net Srinivasan Sivabalan, Matthew Brown
