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By Bloomberg

Poland's central bank left its main interest rate unchanged today, surprising analysts and suggesting its economic outlook has improved after last month's bigger-than-expected reduction.

Governor Marek Belka and the Monetary Policy Council kept the seven-day reference rate at a record-low 2 percent, a decision predicted by four of 39 economists surveyed by Bloomberg. Twenty-eight forecast a 25 basis-point reduction and seven saw borrowing costs dropping by 50 basis points. Policy makers will comment on the decision at a 4 p.m. news conference in Warsaw.

The rate was left on hold even as policy makers signaled that October's half-point cut may not suffice to ward off risks from a deteriorating euro-area economy and the conflict in Ukraine. Today's decision may mean the rate panel has gained confidence after reviewing new central bank projections of economic expansion and consumer-price growth, which has shown annual deflation since June, according to Jaroslaw Janecki, chief economist at Societe Generale SA in Warsaw.

"Over the next few months it's going to be increasingly difficult for the MPC to decide on cuts as inflation gradually accelerates," Janecki said today by phone. "Still, further easing can't be ruled out entirely."

Deflation Bout

While the 10-member Monetary Policy Council already knows the staff forecasts, they will only be made available next week when the central bank publishes its latest Inflation Report. Some policy makers have already predicted gross domestic product will expand by close to 3 percent in the fourth quarter, allowing consumer prices to recover from Poland's first bout of deflation since the early 1980's.

The European Commission concurs with this view, saying the EU's largest eastern economy will "ease marginally" to 2.8 percent growth next year before bouncing back to 3.3 percent in 2016, according to autumn economic forecasts published yesterday. The Commission noted "very low" external pressure pressure while predicting Poland's average inflation will creep up to 1.1 percent in 2015 from 0.2 percent this year.

The zloty strengthened less than 0.1 percent to 4.2253 per euro at 2:18 p.m. in Warsaw. The yield on the two-year government bond dropped three basis points to 1.67 percent.

Better PMI

Forward-rate agreements, used to speculate on borrowing costs, show traders betting on more than a quarter-point of rate cuts during the next three months.

Poland's economy most likely decelerated to an annual 2.8 percent growth pace in the third quarter from 3.3 percent in the previous three months, according to estimates from the Economy Ministry. The Central Statistical Office in Warsaw will report its flash estimate of third-quarter GDP on Nov. 14.

The October purchasing managers' index, published by HSBC Holdings Plc on Nov. 3, suggests any slowdown may be temporary. The gauge of manufacturing rose to a six-month high of 51.2, returning to the above-50 mark signaling expansion after staying below that level for the entire third quarter.

New orders rose for the first time in five months while inventories declined, "suggesting a further boost to production in the coming months," HSBC said. Risks to Polish growth in 2015 are still "skewed to the downside" because of lingering doubts about the euro-area economy, according to Agata Urbanska- Giner, a London-based economist at HSBC.

'Doubtful' Spur

The PMI survey also showed inflationary pressures remained subdued in October, after consumer prices dropped 0.3 percent in September. Inflation has remained below the central bank's target of 2.5 percent since December 2012.

A majority of the Monetary Policy Council, based on their published comments since last month's rate meeting, see no threat of extended deflation. Policy makers share the view that low inflation will persist for at least another year on external causes, so "it's doubtful that we could spur inflation by lowering rates," central banker Jerzy Hausner said in an interview on Oct. 24.

Hausner warned against more monetary easing in case growth strengthens and the reductions turn out to be too aggressive.

"A well-balanced economy is a huge asset that's been well- protected by our conventional policy," Hausner said. "That's in fact the best way to support economic growth."