Hopes rise for interest rate cuts
By : Bogda zukowska
Hopes are mounting for interest rate cuts in the first quarter of the year following signs that the current account deficit is starting to narrow.
With November's current account (C/A) deficit figures at $320 million, down from $850 million the previous month, industry analysts said they now expect a decision from the Monetary Policy Council (RPP) to cut interest rates, although the RPP is still divided over the issue.
"We do not expect the RPP to cut interest rates as early as January 2001, but we will be watching its forthcoming meeting carefully," said Witold Samborski, head of Fortis Securities.
He said the next meeting, on Jan. 24, will also be the first headed by Leszek Balcerowicz, the new president of the national bank, and that all eyes would be on his first actions as boss.
Samborski said Balcerowicz could reschedule his rate cuts to the first quarter of 2001 from the second quarter, as previously expected.
"The RPP has no choice but to cut rates and earlier than it had envisaged," said Witold Wozniak, chief dealer with Deutsche Bank. He said the narrowing C/A gap justifies the interest rate cuts.
A report by Bank Rozwoju Eksportu said surging export sales at a rate of 15-17% also had a major impact on narrowing the current account deficit.
Samborski said the strong exports were surprising considering the strength of the zloty. "The export growth is the best news, bearing in mind that it has been accompanied by a strong zloty, which is usually a hurdle for exporters," Samborski said. He said it was a sign that Polish exports were becoming more competitive.
As a result of November's upbeat deficit figure, the zloty surged to 4.082 against the dollar reaching a nine-month high while more investors gathered for T-bonds at last Wednesday's monthly auction.
Meanwhile, RPP members are still divided over cutting interest rates with some backing the idea, but others remain cautious.
Wieslawa Ziolkowska said interest rates should be cut as early as January or February, but Boguslaw Grabowski urged caution and said the positive C/A deficit figures had resulted from recent economic successes. She said these included a slowdown in inflation and high income from privatization. She said this did not account for uncertainty over the forthcoming year's fuel, food prices and salary increases.
While RPP members agreed that the zloty is still overvalued, many analysts are puzzled by the council's cautious approach to cutting interest rates. "The council's approach is strange. It is in place to change the situation, but it is refraining from lowering interest rates," Wozniak said.
The rates cut would halt the slide in the economy, boosting investment and individual consumption. GDP growth slowed to 3.3% in December from 6.2% a year earlier, according to recent estimates by BRE Bank. Analysts said Poland's high rates, currently at 19-23%, are a major hurdle for economic growth.
Other economic indices under scrutiny included inflation figures that are expected to drop to less than 9% for December compared to 9.3% the previous month, while November export figures rose to $2.7 billion compared to $2.1 billion a year earlier. Meanwhile, exports increased 7% to $25.6 billion over the first 11 months in 2000, while imports rose only 3.2% to $37.6 billion.
Elsewhere, analysts said the RPP's caution over interest rates could result from the expected decision by OPEC, the council of leading crude-oil producers, to limit output and keep the price of crude above $26 a barrel. The OPEC summit is scheduled for Jan. 17, a week before the RPP's meeting.
Meanwhile, a December mission of the International Monetary Fund also called for an early reduction in interest rates.
