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By Bloomberg

With Poland’s borrowing costs at the lowest level relative to the euro area in more than six years, bond investors are signaling an ever greater convergence in their economic prospects.

Polish 10-year yields narrowed to 1.62 percentage points over German bund rates last week, the least since September 2008, according to data compiled by Bloomberg. The spread could shrink to less than 1 percentage point as falling consumer prices in Europe add to pressure for greater monetary easing, according to Bank BGZ SA.

While economists predict the central bank will keep its key interest rate at 2 percent on Wednesday, traders are betting on a half-point reduction before May as consumer prices drop by records in Poland and the euro area amid the plunge in oil prices. Even with the nation’s growth forecast to outpace the 19-member common-currency area this year by three times, their economic cycles are becoming more intertwined, said Pawel Radwanski at BGZ.

“The spread on 10-year bonds will tighten even if the council doesn’t cut rates,” Radwanski, a fixed-income strategist, said by phone from Warsaw on Friday. “The euro area and the Polish economy have more and more synchronized business cycles and markets will expect their rates to be at similar levels in the next 10 years.”

How Low?

The premium investors demand to hold Polish debt over German bunds tumbled after European Central Bank President Mario Draghi’s announcement of a 1.1 trillion-euro ($1.25 trillion) bond-buying program on Jan. 22. Yields on Poland’s 10-year bonds reached a record-low 1.95 percent on Thursday and ended the week at 1.97 percent.

The yield “can go a lot lower,” said Anders Faergemann, a London-based emerging-market fixed-income manager at PineBridge Investments, with $73 billion of assets under management. Yields on bunds “certainly are not going to go higher in the foreseeable future with the ECB announcement,” he said by phone Jan. 27.

Draghi’s plan is to spur euro-area inflation after prices fell by an annual 0.6 percent in January, matching the sharpest decline in the history of the shared currency, data from Eurostat showed Friday. In Poland, consumer prices have dropped for the past six months, sliding 1 percent in December from a year earlier, the steepest deflation since the statistics office started publishing comparable data in the 1980s.

Near Consensus

Poland’s rate-setting panel has kept the key interest rate on hold for the past three months, even though changes in consumer prices have trailed its 1.5-3.5 percent inflation tolerance range for almost two years. Policy makers “aren’t far” from forming a majority to back lower rates as there is still some room for further easing, Governor Marek Belka said Jan. 23.

Poland’s economy is likely to grow 3.3 percent this year, economist forecasts on Bloomberg show. The euro area accounted for 53.6 percent of Polish exports in the first 11 months of last year, according to data from the Polish statistics office.

“There is space for further yield compression, but it’s limited” given the extent the spread has already shrunk, Arkadiusz Urbanski, a fixed-income analyst at Bank Pekao SA in Warsaw, said by phone on Friday. “If deflation deepens, increasing the risk it stays for longer, and the zloty strengthens, threatening the real economy, the rate council will have to make amends and ease policy more.”

The zloty climbed 0.7 percent to 4.1831 against the euro at 4:37 p.m. in Warsaw on Friday, extending the biggest monthly gain since July 2012 at 2.5 percent.

Union Derailed

The last time the spread over bunds fell below 1 percentage point was 2007, when investors were betting Poland would soon join the euro area, a plan that was derailed by the global financial crisis. The basic foundations of Europe’s monetary union “are starting to crumble,” Finance Minister Mateusz Szczurek said Jan. 28. Given the “unclear” cost-benefit balance, “do we want to board this train? Maybe we should find out first where it’s going,” he said.

“A 1 percentage-point spread over bunds is absolutely possible, even if we weren’t to adopt the euro,” BGZ’s Radwanski said. “The exchange-rate risk is relatively low.”