Azernews.Az

By Bloomberg

Financial trauma in Greece and China is reversing projections for interest rates to rise even in one of Europe’s fastest-growing economies.

Traders betting as recently as Tuesday on the possibility of a Polish rate increase leaned more toward a cut by Wednesday, prices of six-month forward-rate agreements show.

The turnaround highlights the speed at which analysts and investors are re-evaluating how central banks will respond to the twin threat from China’s $3.9 trillion equity rout and the fallout should Greece exit the euro. Traders shifted their bets for higher Federal Reserve rates to next year from 2015, a Morgan Stanley index showed Wednesday.

“I’m starting to wonder whether the rate council won’t cut rates if the external situation deteriorates significantly and demand in the Polish economy begins to wane,” Piotr Matys, a foreign-exchange strategist at Rabobank International in London, said by e-mail on Wednesday. “The rate council may have to cut rates for Poland to pass through the perfect storm around it.”

Central bank Governor Marek Belka said Wednesday he doesn’t expect to reduce after the rate-setting panel kept its benchmark interest rate unchanged at a record-low 1.5 percent for the fourth month, meeting expectations from all 35 economists surveyed by Bloomberg. The economy probably grew about 3.6 percent in the second quarter, Belka said, the third fastest pace in the European Union.

Bank Holiday

Chinese equities rebounded on Thursday from a sell-off that sent the Shanghai Composite Index tumbling 32 percent from its peak on June 12 as the government bolstered efforts to arrest the slump. The Greek government extended capital controls through Monday and Prime Minister Alexis Tsipras has until midnight Thursday to present his European colleagues with a plan that includes spending cuts, in exchange for a bailout.

Events in China and Greece were largely to blame for the zloty’s slump to a five-month low of 4.2401 per euro on Wednesday, Belka said. The currency rose 0.3 percent to 4.2282 at 10:05 a.m. in Warsaw, curbing its drop in the past month 1.2 percent, the fifth-worst performance among 24 emerging-market peers, according to data compiled by Bloomberg.

While Poland’s economic exposure to Greece is “minimal,” the central bank is “ready to react” to any market shocks resulting from the crisis, Belka said.

Prolonging Deflation

Forward-rate agreements showed a higher probability of the central bank cutting than raising rates this year for the first time in two months on Wednesday. Traders also pared wagers for rate increases through the end of 2016, with the contracts trading 17 basis points above the Warsaw Interbank Offered Rate today. Just last month, they showed scope for more than a half- percentage point jump.

Rates are likely to stay on hold through 2017, William Jackson, a senior economist at Capital Economics, wrote in a report on Wednesday.

The rate council “is paying more attention to domestic conditions, including the labor market and the inflation outlook, than developments in the euro zone periphery,” Jackson said.

Prices in Poland fell 0.9 percent from a year earlier in May, compared with a 1.1 percent drop in April. Deflation will be between 0.4 and 1.1 percent this year, before prices rise by 0.7 to 2.5 percent in 2016, the central bank estimated Wednesday.

“We’re already seeing a wave of price declines in all kinds of commodities, which will prolong Poland’s exit out of deflation,” Rabobank’s Matys said.