Poland's One-Time Cardinal Rate-Cut Advocate Changes His Tune

(Bloomberg) -- The man who called for Poland to cut interest rates two years ago when economists were discussing when borrowing costs should rise is again going against the grain.

As global central banks react to a creeping economic slowdown by reining in their monetary tightening campaigns, investors in eastern Europe’s biggest economy have reversed their bets that interest rates might rise and now say a cut is more likely by year-end. For Monetary Policy Council member Eryk Lon, it’s more likely rates will stay unchanged into 2022, or even longer. A cut will happen only in the unlikely case of a severe economic hit.

“Stable rates is our asset against other countries,” Lon said in an interview in Warsaw on Thursday. “It confirms that Poland is strong, it raises confidence in our country from Polish consumers and entrepreneurs as well as from foreign partners. I’m deeply convinced that our country is one of the most attractive places to invest in the world. For these reasons, I see great advantages for the Polish economy from stability of Polish monetary policy.”

While Lon didn’t rule out easing, his comments are more neutral than when he flummoxed his colleagues in 2017 by advocating lower borrowing costs. Now they’re more in line with those of Governor Adam Glapinski. The central bank chief said for the first time on Wednesday that rates could theoretically fall from a record-low 1.5 percent -- where they’ve been for four years -- in a "critical" situation.

“One cannot rule out monetary easing in the face of a significant economic slowdown in Poland,” said Lon. “It’s worth being ready for less optimistic scenarios. They would trigger a rate cut or would turn us toward non-standard tools.”

Instead, Lon sees the economy slowing "insignificantly" and inflation stabilizing near the bank’s 2.5 percent target.

Until recently, policy makers warned against a rate cut, saying a reduction would hurt the stability of small banks. Glapinski cited a central bank study this week that played down the negative impact. Lon shared that view, indicating the banking argument shouldn’t stay in the way of any potential cut. He said:

• A cut may turn out beneficial for cooperative banks, who have proven that they can adapt quickly to changes
• The banking sector is important, however one shouldn’t forget about the real economy
• Lower loan spreads caused by rate cuts, while increasing the volume of loans, don’t necessarily mean the automatic deterioration of banks’ profitability

A rate cut, for Lon, would be justified by “a strong cooling down of the economy, coupled with deflationary factors” and accompanied by the “strong weakening” of consumer and corporate confidence.

“I believe the economic downturn scenario is of little probability,” Lon said.

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