Central Bank of Poland Cuts the Benchmark Interest Rate

The Central Bank of Poland has decided to cut the benchmark interest rate to a record low as the largest Eastern economy under the European Union is currently struggling with the slowing down of the growth. The Narodowy Bank Polski has decided to lower the 7-day reference rate by a quarter point to 3% on today, thereby matching the estimate of most of the analysts.

Policy makers therefore have resumed making rate cuts after a pause that it took on last month. The inflation of Poland slowed down to the weakest level in more than 6 years. Apart from that, the manufacturing industry experienced a decline which is the biggest in last 45 months. According to the Governor of the Central Bank, Marek Belka, this reduction in the borrowing costs should not be regarded as a start of a new round of monetary easing. Still, when the policy makers will meet for the next time, a further cut or unchanged rates – both will be possibilities.

According to Belka, the decision of today should be treated as a special adjustment of what the bank announced a couple of months ago. The bank feels that the growth in consumer price and the high frequency data denote that the inflation rate will possibly stay on a very low level.

The declines were extended by the Polish bond yields. The 10-year Government bond yields showed a decline of 15 basis points as the same is currently at 3.10%. On the other hand, the forward rate agreements are currently factoring in around 50 basis points of cuts in the upcoming 6 months, according to the difference between the contracts and the interbank offered rate of Warsaw.

52% of the total Polish exports are bought by the Euro area and the same region is experiencing a recession at this point of time. This has put a damper on the economic growth of Poland. On last week, the 2013 growth forecast for Poland was cut to 1.1% by the European Commission and this is the slowest in the last 12 years.

According to the Chief Emerging Markets Economist of Standard Bank, Timothy Ash, the data flow is supportive of further lows in the rates. Between the last November and March, the borrowing costs have been reduced by a total of 150 basis points by the policy makers.