Another record low rate and more cuts likely

Against a background of slowing economic growth and low inflation figures, last week's reduction of 25 basis points had been widely expected.

The bank signaled that its quarter point cut in the main rate to an all-time low of 4.5 percent is unlikely to be the last.

So far this year the bank has implemented cuts totaling 200 basis points, and by maintaining its easing policy bias, indicates further cuts are more probable than increases.

With annual inflation at a 21-month low of 1.3 percent in July, price growth is expected to stay below the bank's 2.5 percent target well into 2006, leaving room for more rate cuts once uncertainty around upcoming elections fades.

Markets had widely priced-in the reduction after data showed domestic demand shrank in the second quarter and investment was well below the double-digit growth hoped for in early 2005.

"The economy is still pretty soft. At the same time inflation remains well below the target and will probably remain below 2.5 percent until the end of next year," said Lars Christensen, senior analyst with Danske Bank in Copenhagen.

"The important sign is that we are clearly still in an easing mood. We expect the next cut already next month, even with the [September 25 parliamentary] election - which if it goes as expected will probably ease some fears in the market."

Recent opinion surveys show the pro-business Civic Platform winning the elections and forming a coalition with the conservative Law and Justice - parties that both want to reduce budget deficits but are split over how quickly to adopt the euro.

Polish rates remain the second-highest among central Europe's four big economies.

Czech and Slovak rates stand at 1.75 and three percent respectively, and Hungary's at 6.25 percent after a surprise sharp 50 basis point cut by the central bank in Budapest a fortnight ago.

Growth in the second quarter was 2.8 percent, up from 2.1 percent in the first three months, but still below last year's 5.4 percent and the four to five percent non-inflationary growth rate some policymakers say is possible. (Reuters)

JT