Poland Delivers ‘Bazooka’ Cut to Boost Economy Ahead of Vote

Agnieszka Barteczko and Piotr Skolimowski
·3 min read

(Bloomberg) -- Poland’s central bank delivered a surprisingly steep interest rate cut in a bid to boost a slowing economy less than six weeks before a tightly-contested election, weakening the zloty and hammering banking stocks.

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The decision to lower the benchmark rate by three quarters of a percentage point — the most since the fallout from the great financial crisis in 2009 — to 6% caught economists off guard. Most had predicted a quarter point reduction.

The decision takes on a political dimension coming so close to the Oct. 15 election and has left investors guessing at the next move, with some predicting that the easing cycle has ended as soon as it began.

“It’s a bazooka cut,” said Marek Drimal, a strategist at Societe Generale SA in London. “Let’s see what the central bank has to say, but for now the market will be scratching its head.”

The decision will increase the focus on Governor Adam Glapinski, who has previously said a rate cut was warranted only if inflation slides into the single digits. It came in at an annual 10.1% in August.

A polarizing figure, Glapinski has become a target of attacks by the opposition over the country’s cost-of-living crisis and his close ties to the ruling Law & Justice party, which is seeking a third term in office. The governor will brief media at 3 p.m. on Thursday.

He’s likely to point to signs of weakening in Poland’s $680 billion economy, with wages and industrial output performing worse than expected over the summer following the second-quarter contraction. The central bank said in a statement that it acted preemptively to boost flagging demand, which will bring inflation more rapidly to its 2.5% target over the medium-term.

Some central bank watchers have taken issue with the reasoning. Bank Millennium SA economists said the cut would make inflation fighting harder, in part because of a weaker zloty. The Polish currency lost 1.7% to 4.5710 per euro at 5 p.m. in Warsaw, the weakest level since May.

Economists at Bank Pekao SA expect a quarter-point cut in October, but kept their end-2023 interest-rate target at 5.75%. Meanwhile, analysts at Erste Bank as well as the Polish Economic Institute and Bank Millennium forecast no more cuts this year.

Rafal Benecki, chief economist at ING Bank Slaski SA, said the central bank’s statement didn’t mention pro-inflationary trends, including fiscal expansion, high core inflation and weak consumer confidence.

In the months ahead of the election, in which Law & Justice may struggle to secure a majority, the ruling party and the main opposition Civic Platform have proposed a raft of social spending. The government last month raised its budget deficit projection for the next year — and is likely to allow for temporary tax cuts on food to expire in January.

“The risk is that at least some market participants may interpret it as a pre-election gift for the governing Law & Justice party as well,” said Piotr Matys, a senior currency strategist at In Touch Capital Markets.

--With assistance from Barbara Sladkowska, Andrea Dudik, Konrad Krasuski, Wojciech Moskwa and Piotr Bujnicki.

(Updates with economist comments from eighth paragraph.)

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