Polish Traders Overestimate 2011 Rate Rise, BNP Says (Update1)
April 27, 2010, 4:10 AM EDT
By Piotr Skolimowski
April 27 (Bloomberg) -- Traders of Polish interest-rate contracts are overestimating the likely increase in borrowing costs next year as the central bank will seek to avoid higher rates that could spur the zloty’s advance, BNP Paribas SA said.
Investors are pricing in a 91 basis-point increase in the one-year Polish swap rate, based on the difference between the current rate of 4.03 percent and forward contracts for the same- maturity swaps deliverable in a year’s time at 4.94 percent, data compiled by Bloomberg show. The forwards yield will fall to 4.5 percent through June as the central bank is unlikely to raise rates until the second half of 2011, said Bartosz Pawlowski, a London-based emerging-markets strategist at BNP.
Policy makers begin their first rate-setting meeting today since the plane crash April 10 that killed President Lech Kaczynski and central bank Governor Slawomir Skrzypek. The central bank has held its benchmark rate at a record low 3.5 percent since June as inflation dropped to a 30-month low and the zloty posted its strongest quarterly rally in six years.
“The market is still convinced that interest rates will have to rise a lot in the future but it’s not true,” Pawlowski said in an interview. “A rate cut is more probable than a hike. Our main view is that the rates will not change at least until the second half of next year.”
All 18 economists surveyed by Bloomberg predict the main interest rate will be left unchanged when policy makers announce their decision tomorrow.
Intervention
The swap rate, a benchmark for corporate borrowing costs, shows the level at which investors agree to lock in fixed-rate payments in exchange for floating. In forward contracts, an investor agrees to deliver an asset for a specified price at a future date.
The central bank bought foreign currency to weaken the exchange rate on April 9 for the first time since 1998 to protect the competitiveness of Poland’s exports. The National Bank of Poland intervened after the currency climbed 15.8 percent in the past year, touching a 16-month high against the euro on April 7, as the only European Union economy to avoid a recession through the credit crisis attracted investors.
Some central bankers argued at their meeting last month for a “temporary easing” of monetary policy in response to the zloty’s rally, according to minutes published last week.
Zloty ‘Too Strong’
The zloty remains “too strong” and the government supports further central bank interventions to stall the currency’s appreciation, Deputy Finance Minister Ludwik Kotecki said on April 17. Deputy Governor Piotr Wiesiolek is leading the central bank’s monetary policy council until a permanent appointment is made.
The zloty weakened 0.6 percent to 3.9009 per euro as of 10 a.m. in Warsaw.
“The central bank is clearly worried about the zloty,” Pawlowski said. “If it decides to intervene it would be hard to talk about interest-rate increases because that would encourage speculative flows into the currency.”
Slowing inflation has reduced the need for higher interest rates, according to Pawlowski. The pace of price increases in March was the slowest since September 2007, helped by reduced growth in consumer spending. The central bank forecasts inflation will decline to the lower end of its 1.5 to 3.5 percent target range. The economy will expand 3 percent this year, after growing 1.8 percent in 2009, based on government estimates.
“The inflation reality will argue for no rate increases,” Pawlowski said. “The middle of the year will show lower inflation, the economy will continue to grow below the potential and the zloty is strong.”
April 27, 2010, 4:10 AM EDT
By Piotr Skolimowski
April 27 (Bloomberg) -- Traders of Polish interest-rate contracts are overestimating the likely increase in borrowing costs next year as the central bank will seek to avoid higher rates that could spur the zloty’s advance, BNP Paribas SA said.
Investors are pricing in a 91 basis-point increase in the one-year Polish swap rate, based on the difference between the current rate of 4.03 percent and forward contracts for the same- maturity swaps deliverable in a year’s time at 4.94 percent, data compiled by Bloomberg show. The forwards yield will fall to 4.5 percent through June as the central bank is unlikely to raise rates until the second half of 2011, said Bartosz Pawlowski, a London-based emerging-markets strategist at BNP.
Policy makers begin their first rate-setting meeting today since the plane crash April 10 that killed President Lech Kaczynski and central bank Governor Slawomir Skrzypek. The central bank has held its benchmark rate at a record low 3.5 percent since June as inflation dropped to a 30-month low and the zloty posted its strongest quarterly rally in six years.
“The market is still convinced that interest rates will have to rise a lot in the future but it’s not true,” Pawlowski said in an interview. “A rate cut is more probable than a hike. Our main view is that the rates will not change at least until the second half of next year.”
All 18 economists surveyed by Bloomberg predict the main interest rate will be left unchanged when policy makers announce their decision tomorrow.
Intervention
The swap rate, a benchmark for corporate borrowing costs, shows the level at which investors agree to lock in fixed-rate payments in exchange for floating. In forward contracts, an investor agrees to deliver an asset for a specified price at a future date.
The central bank bought foreign currency to weaken the exchange rate on April 9 for the first time since 1998 to protect the competitiveness of Poland’s exports. The National Bank of Poland intervened after the currency climbed 15.8 percent in the past year, touching a 16-month high against the euro on April 7, as the only European Union economy to avoid a recession through the credit crisis attracted investors.
Some central bankers argued at their meeting last month for a “temporary easing” of monetary policy in response to the zloty’s rally, according to minutes published last week.
Zloty ‘Too Strong’
The zloty remains “too strong” and the government supports further central bank interventions to stall the currency’s appreciation, Deputy Finance Minister Ludwik Kotecki said on April 17. Deputy Governor Piotr Wiesiolek is leading the central bank’s monetary policy council until a permanent appointment is made.
The zloty weakened 0.6 percent to 3.9009 per euro as of 10 a.m. in Warsaw.
“The central bank is clearly worried about the zloty,” Pawlowski said. “If it decides to intervene it would be hard to talk about interest-rate increases because that would encourage speculative flows into the currency.”
Slowing inflation has reduced the need for higher interest rates, according to Pawlowski. The pace of price increases in March was the slowest since September 2007, helped by reduced growth in consumer spending. The central bank forecasts inflation will decline to the lower end of its 1.5 to 3.5 percent target range. The economy will expand 3 percent this year, after growing 1.8 percent in 2009, based on government estimates.
“The inflation reality will argue for no rate increases,” Pawlowski said. “The middle of the year will show lower inflation, the economy will continue to grow below the potential and the zloty is strong.”