Euro Debate Ignites in East EU in Face of Public Skepticism

While Greece may have one foot out the door, policy makers in the European Union’s east are reopening the debate about whether to join the euro area after years of shunning the currency during the global financial crisis.

In the Czech Republic, the prime minister said on Wednesday that joining the euro soon would help the economy after the president challenged the central bank’s long-standing resistance with a vow to appoint policy makers who favor the common currency. In Poland, the main divide between the top two candidates in the May 10 presidential election is whether the region’s biggest economy should ditch the zloty.

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“It’s quite interesting how the sentiment has shifted — I’m slightly surprised by this,” William Jackson, London-based senior economist at Capital Economics Ltd., said by phone on Wednesday. “As the story coming from the euro zone in recent years has been negative, it’s very hard to imagine how the euro case for the public would be made now.”

The obstacles are many. Romania, which has set 2019 as a potential target date, and Hungary don’t meet all the economic criteria. Poland faces legal hurdles and the Czech government has said it won’t set a date during its four-year term. As a standoff between Greece and euro-area leaders threatens to push the country into insolvency and potential exit, opinion polls show most Czechs and Poles oppose a switch.

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Euro Concerns

The appeal of the euro, which all European Union members save Britain and Denmark are technically obliged to join, suffered when the area had to provide emergency loans to ailing members during the economic crisis. While five ex-communist countries that joined the trading bloc in 2004 — Slovakia, Slovenia, Estonia, Latvia, and Lithuania — have acceded, the Czech Republic, Poland and Hungary don’t have road maps.

The region’s three biggest economies argued that floating currencies and control over monetary policy helps shield themselves against shocks like the euro crisis even if smaller countries may benefit from lower exchange-rate volatility and reduced trade costs. Facing weakening in their korunas, zlotys, and forints, some politicians in eastern Europe are questioning that logic.

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Confronting ‘Bogeyman’

The debate in the Czech Republic began again in earnest in February, when President Milos Zeman said he was “very embarrassed” that Slovakia beat the Czechs into the currency. Prime Minister Bohuslav Sobotka voiced support for “the earliest possible target date,” in an interview on Wednesday, even as his main ruling partner, the ANO party of billionaire Finance Minister Andrej Babis, isn’t ready to set a timetable.

“Even though many here don’t hesitate to present the euro as a bogeyman, at closer look we’re talking about a normal and comfortable tool to seek social prosperity,” Sobotka said in an e-mailed response to Bloomberg questions on Wednesday.

In Poland, opposition presidential candidate Andrzej Duda is trying to unseat incumbent Bronislaw Komorowski with the slogan “Yes to Europe, No to the Euro.” He has accused the president of trying to ruin Polish families by adopting a currency that will drive up prices.

Poland should enter the euro area only after “very precise analysis” and only when it benefits the country and ordinary Poles, Prime Minister Ewa Kopacz said late Wednesday. She said Duda’s campaign was misleading because it characterized the government as pushing for adoption.

While the campaign has drawn a statement from Komorowski that Poland may have to hold a referendum on adoption, data indicate that, at least since the economic crisis, the euro may actually aid new members rather than impoverish them.

Euro Gains

Since 2008, the Czech koruna has weakened 13 percent against the euro and the Polish zloty, the Hungarian forint and Romanian leu have lost more than 20 percent. That has made those nations’ exports more competitive and helped drive growth and deter inflation.

But Slovaks, Slovenes and others with wallets stuffed with the common currency have seen their earning power remain steady. Slovakia is also borrowing at negative yields, earning 0.03 percent for five year debt, compared with the Czech yields of positive 0.02 percent.

The stability of the currency is also attractive to companies such as Skoda Auto AS, whose supply chain is closely tied to its owner Volkswagen AG, and utility CEZ AS, the largest publicly traded company in the region.

“The Czech economy is very closely tied to the euro area, especially Germany,” CEZ Chief Financial Officer Martin Novak said last month. “Adopting the euro would make many companies’ lives easier.”

Opposition Obstacle

Some countries don’t have the luxury of debate. In Croatia, the economic crisis has pushed back the timeline for entry. And even though Bulgaria’s finance minister said in January that there’s political consensus to join as soon as possible, according to a report from newspaper 24 Chasa, President Rosen Plevneliev said last month he sees entry into the currency-stability test mechanism in 2018.

Romania, the EU’s second-poorest country, needs to catch up economically to benefit from the euro, central bank Deputy Governor Bogdan Olteanu said on Thursday.

“We’ll have to increase the GDP per capita by at least 10 percent in order to be reasonably competitive inside the union,” he said.

For the bigger economies, public opinion remains an obstacle, with 76 percent of Czechs opposing euro adoption, versus 16 percent who support it, according to a survey of 1,027 people taken a year ago by pollster CVVM.

In Poland, where a constitutional amendment would be needed to give the ECB the power to conduct monetary policy and issue currency, 68 percent oppose a switch, according to an October 2014 survey by pollster CBOS.

“The issue is definitely heating up in CEE. Poland is relatively better positioned for this,” Mai Doan, a London-based economist at Bank of America Corp., said by e-mail on Wednesday. “The Czech population remains very euro-skeptic, while Romania likely still has work to do in terms of real convergence.”

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Poland ends easing cycle with deeper-than-expected rate cut

(Refiles to eliminate superfluous text; no change in main text)

* Central bank cuts rates by 50 bps, more than expected

* Bank says rate-cut cycle is over

* Zloty gains after announcement that easing finished

* Falling consumer prices, ECB’s QE key reasons for cut

By Pawel Florkiewicz and Marcin Goettig

WARSAW, Mar 4 (Reuters) – Poland ended its monetary-easing cycle on Wednesday with a deeper-than-expected rate cut intended to curb deflation and prevent excessive zloty gains as the euro zone begins a massive stimulus programme.

The central bank’s Monetary Policy Council cut the benchmark rate 50 basis points to 1.50 percent, a record low. Most analysts polled by Reuters had expected a 25-basis-point reduction.

The zloty weakened after the decision, then reversed losses and gained up to 0.9 percent after the bank said its easing cycle was over.

“There is never a situation that the promise of the MPC in any country is carved in stone,” Governor Marek Belka said. “But taking into account the current economic situation … I cannot see room for further rate cuts and expectations thereof.”

Belka said the European Central Bank’s bond-buying programme was one factor leading to the reduction.

“If a major currency … is a subject to a quantitative easing at a significant scale, then one can expect appreciation pressure at currencies surrounding the euro,” he said at a conference following the decision.

Poland has cut its benchmark interest rate by a total of 325 basis points since late 2012 to spur its economy, the largest in central and eastern Europe.

The cut brings Polish rates closer to the level in the euro zone, the Czech Republic and the United States, all of which have rates near zero.

Belka said the 50-basis-point cut was backed by a solid majority of the nine council members, eight of whom end their term early next year. Belka’s term ends in June 2016, but unlike other members he may be re-appointed for a second term.

“THAT’S IT”

The Council also announced on Wednesday its new tri-annual economic forecasts, which slashed its forecast for 2015 and 2016 inflation but raise its expectations for economic growth.

The economy is now expected to grow about 3.5 percent this year, up from 3.3 percent last year. Many analysts expect new European Union development funds to further support Poland’s economy this year.

A drop in oil prices caused Polish consumer prices to fall an annual 1.3 percent in January, further away from the bank’s plus 2.5 percent target. But Poland’s relatively low private and public debt has kept falling prices from weighing on economic activity.

Data released on Monday showed Polish manufacturing continued to expand in February. Employment rose at its second-fastest level since 1998.

The unusual mix of deflation and growth led to disagreements in the Council on the need for easing earlier this year. Tensions were aggravated by secretly taped recordings revealed last year in which Belka used expletives to describe MPC members.

For Belka’s highlights, statement go to: (Additional reporting by Pawel Sobczak and Jakub Iglewski; Writing by Marcin Goettig; Editing by Larry King)

Euro plunges to lowest since 2012

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Zloty hits 4-month high, Polish cbank seen keeping rates flat

imageBUCHAREST: The Polish zloty hit a fresh four-month high against the euro, lifted by expectations that the central bank will decide not to cut interest rates later on Wednesday, while other currencies in central Europe were mostly flat.

Poland’s central bank had said only a deteriorating growth outlook for the region’s biggest economy would prompt further monetary easing, signalling it would look beyond falling consumer prices.

Poland’s benchmark interest rate now stands at 2.00 percent, compared with the euro zone’s 0.05 percent. Analysts polled last week expected Poland to keep rates unchanged throughout 2015.

“The National Bank of Poland has signalled this outcome well in advance, hence (the decision) is likely to prove market-neutral, with a slight bias towards a stronger zloty (if rates are left unchanged) as there are likely to be at least some rate cut bets among market participants in the present ECB environment,” Commerzbank said.

By 0910 GMT, the zloty traded at 4.156 to the euro and the forint at 306.69 per euro, both up 0.3 percent on the day. The Romanian leu, the Czech crown and the Serbian dinar were flat.

Hungarian players are closely watching Poland’s rate

decision, which should preserve the Polish yield advantage over the euro zone, as it might affect Hungarian rate expectations.

“The Polish rate meeting is in focus today.

There is a small chance of a rate cut but I think a shift towards a more dovish rhetoric is possible, also in light of the concerns over Russia,” said a Budapest-based trader, referring to the impact on Poland of sanctions imposed on Russia in the Ukraine crisis.

Official data showed Hungary’s and Romania’s economies expanded by 3.2 percent on the year in the third quarter, confirming preliminary released data.

Copyright Reuters, 2014

Central European factory output shines alongside euro zone gloom

By Marcin Goettig

WARSAW (Reuters) – Central European factory output accelerated in November, with rising domestic demand, relatively low debt and falling oil prices helping the region outperform the stagnating euro zone.

Poland’s manufacturing PMI rose to 53.2 last month, its highest level since March, from 51.2 in October, Monday’s data showed. Analysts polled by Reuters had expected the PMI to fall to 51.0. The 50 mark separates expansions from contractions.

Czech manufacturing PMI also expanded more than predicted. The PMI rose to 55.6 last month from 54.4 in October. Analysts had forecast the index to fall slightly.

Hungary’s PMI, compiled under a different methodology, rose to 55.1 in November, well above its long-term average.

“Manufacturing PMIs are now well above 50 in all central European economies, foretelling industrial production growth in a 5-10 percent year-on-year range over the coming months,” said Michal Dybula, CEE economist at BNP Paribas.

This contrasts with stagnation in manufacturing in the euro zone, central Europe’s largest export market, where new orders fell in November at the fastest pace in 19 months.

“Good PMI readings from central Europe may actually offer some silver lining also for Germany, as its manufacturing sector is closely connected with the region,” said Radomir Jac, chief analyst at Generali PPF Asset Management.

The combined annual output of Poland, the Czech Republic and Hungary accounts for 5 percent of that of the European Union and 6.6 percent of the euro zone’s, a bloc struggling with high public and private debt and discord over policy responses.

OUTLOOK

Public debt is much lower than the euro zove average of more than 90 percent of gross domestic product (GDP), at 50 percent in Poland, 46 percent in the Czech Republic and 76 percent in Hungary.

The Polish and Czech banking systems are also well-capitalised, allowing lower official interest rates to spur domestic demand and consumption.

Since 2008, Poland’s economy has grown by 20 percent, compared with 1.6 percent shrinkage in the euro zone’s. Poland’s unemployment rate fell to a 5-year low and corporate credit rose at its fastest pace in 2 years in October.

Markit, which published the PMI data, said job creation in Czech manufacturing rose at its fastest pace in four-and-a-half years last month, with new business from export markets increased at the fastest rate in six months.

BNP’s Dybula said falling oil prices are also likely to help the region, which relies on oil imports.

Meanwhile exporters can offer more competitive pricing thanks to the Polish zloty (EURPLN=), Czech crown (EURCZK=) and Hungarian forint (HUF=) weakening about 8-9 percent versus the dollar since the start of July.

(Writing by Marcin Goettig; Additional reporting by Jason Hovet and Rober Muller in PRAGUE, Sandor Peto in BUDAPEST; Editing by Ruth Pitchford)

Polish Bond Yields Drop to Record as EU Cuts Growth Outlook

Polish government bonds advanced, pushing yields to record lows, as the European Commission cut euro-area growth forecasts and before a predicted central bank interest-rate cut tomorrow.

The yield on the country’s five-year zloty note dropped seven basis points to 1.96 percent at 2:03 p.m. in Warsaw, taking this year’s decline to 168 basis points. The 10-year bond yielded 2.52 percent, down five basis points and curbing the spread over similar German debt to 171 basis points, two basis points above a six-year low reached last week.

Poland’s central bank it seeking to prop up growth and combat disinflation imported from the slowing euro-area, the nation’s main trading partner. The 18-nation euro-region economy will expand 0.8 percent this year and 1.1 percent in 2015, down from projections for 1.2 percent and 1.7 percent in May, the Brussels-based commission said today.

The “forecasts are contributing to the decline in yields,” Pawel Radwanski, a Warsaw-based economist at Bank BGZ SA, said by e-mail. “Inflation expectations are falling, both in Poland and in Europe.”

Today’s report forecasts inflation at 0.8 percent in 2015, less than half the European Central Bank’s goal of just under 2 percent. Poland’s consumer prices fell for a third month in September.

The country’s policy makers will probably cut the benchmark rate by 25 basis points to 1.75 percent tomorrow, according to a Bloomberg survey of 39 economists. The zloty was little changed at 4.2236 per euro, leaving it 1.6 percent weaker this year.

The ECB Governing Council will decide on monetary policy on Nov. 6 after cutting its benchmark rate to a record-low 0.05 percent in September and beginning covered-bond purchases to boost inflation and rekindle growth.

“We still believe there is room for further easing” in Poland, Katarzyna Rzentarzewska, an economist at Erste Bank Group AG, said in a report today.

To contact the reporter on this story: Maciej Onoszko in Warsaw at [email protected]

To contact the editors responsible for this story: Wojciech Moskwa at [email protected] Matthew Brown, Daliah Merzaban

Polish Rate Low Enough for Hausner as Outlook Deters Cuts

Poland’s bigger-than-expected reduction of its main interest rate is enough to jumpstart the economy after a slowdown, with an improving outlook removing the need for more easing, policy maker Jerzy Hausner said.

“I consider the current level of interest rates as adequate in light of available economic forecasts,” Hausner said in an interview in Warsaw approved for publication today.

Policy makers lowered their key interest rate by a half-point on Oct. 8 to a record 2 percent to ward off risks from a deteriorating euro-area economy and the escalating conflict in Ukraine. That was the first reduction since July last year, when the 10-member Monetary Policy Council ended its previous easing cycle before a projected uptick in economic growth.

The comments thrust Hausner into the debate that followed the surprise cut as rate setters wrangle over Poland’s policy path. While Andrzej Bratkowski and Jerzy Osiatynski see scope to decrease rates by as much as 75 basis points, Elzbieta Chojna-Duch and Andrzej Kazmierczak are urging a pause to assess the impact of the October reduction. Jan Winiecki called the cut “a wasted effort” and Andrzej Rzonca warned the Polish economy may stagnate as a result of more easing.

The reduction was predicted by seven of 40 economists surveyed by Bloomberg. The others forecast a quarter-point cut.

No Justification

In the face of conflicting views, Hausner counsels patience.

“Changes in interest rates have an effect on the economy in four to eight quarters,” he said. “That’s the basic rule in monetary policy. And the economy, based on current forecasts, will slightly accelerate in the second half of 2015. So I don’t see any significant justification for loosening monetary policy.”

The yield on the government’s two-year debt rose one basis point, or 0.01 percentage point, to 1.7 percent at 2:10 p.m. in Warsaw. The zloty traded little changed at 4.225 per euro.

Spurred by record-low borrowing costs, the $ 518 billion economy accelerated to 1.1 percent from a year earlier in the first quarter, the fastest quarterly pace since 2012. Still, second-quarter growth slowed to 0.6 percent and raised concerns among some policy makers over “the risk of a further decrease in GDP growth in subsequent quarters,” according to minutes of the central bank’s rate meeting this month.

The Finance Ministry has already cut its 2015 growth forecast to 3.4 percent from 3.8 percent, citing weakness in the euro region, which buys 54 percent of Polish exports.

Losing Momentum?

While the economy has “lost some steam” and will be weaker in the course of the next three quarters, growth will hover near 3 percent, Hausner said.

“Nothing indicates that growth suddenly slowed down to such a pace that more cuts would be justified,” he said. “The probability of maintaining interest rates at current levels is greater than that of reducing them. Of course, after stating that, we must take into account the possibility of changing our stance on this, depending on new data suggesting a noticeable worsening of the Polish economy.”

After 17 months of below-target inflation, Polish consumer prices have fallen for three months since July, the first period of deflation since the early 1980s. Weak demand pressure and the low inflation rate in the euro area are among factors that will curtail price growth in Poland, according to Hausner.

‘Permanently Low’

“We are talking about long-term maintenance of slow inflation, not deflation,” he said. “Permanently low inflation in the Polish economy is caused by external factors, so it’s doubtful that we could increase inflation by lowering rates.”

As Poland crafts its next move, it needs to remain mindful of looming rate discrepancies as some global central banks prepare to tighten policy, Hausner said.

Rate setters “can’t forget about a possible shift in U.S. monetary policy that will lead to foreign capital outflow from emerging markets, and lower rates in Poland could only be another reason for that,” he said.

Hausner also warned against reversing course on easing in case economic growth strengthens and rate cuts turn out to be too aggressive. “Monetary policy isn’t a game of Russian Roulette,” he said.

As there aren’t any “dangerous imbalances” in the Polish economy, it can be unsettled by quick policy changes, undermining the rate-setting council’s credibility and authority, according to Hausner.

“A well-balanced economy is a huge asset that’s been so well-protected by our conventional policy,” Hausner said. “That’s in fact the best way we could support economic growth.”

To contact the reporter on this story: Dorota Bartyzel in Warsaw at [email protected]

To contact the editors responsible for this story: Balazs Penz at [email protected] Paul Abelsky, Pawel Kozlowski

Poland Has Room for ‘Decisive’ Rate Cuts, Osiatynski Says

Poland’s central bank has room to trim interest rates by another three quarters of a percentage point to revive the slowing economy and discourage inflows of short-term capital, monetary-policy maker Jerzy Osiatynski said.

The difference between borrowing costs in Poland and the euro area is still “very high,” even after last week’s larger-than-expected half-point cut, Osiatynski said yesterday in an interview in Warsaw. He declined to speculate on what policy makers will do at their next meeting on Nov. 5.

“Our steps should be decisive, not spread out over time, in part to prevent foreign-exchange volatility as it’s bad for the economy,” according to Osiatynski. “Once and for good is the right approach.”

The central bank’s Oct. 8 reduction in the main interest rate was the first cut since July 2013 and was twice as big as predicted in a Bloomberg survey of economists. Policy makers are grappling with falling consumer prices, shrinking manufacturing and lower exports as Germany’s economy slows and Russia flirts with a recession because of sanctions over the Ukraine conflict.

Poland’s $ 518 billion economy expanded 0.6 percent from the previous three months in the second quarter, less than the 1.1 percent it grew between January and March. The Finance Ministry cut its 2015 growth forecast to 3.4 percent from 3.8 percent, citing weakness in the euro region, which buys 54 percent of Polish exports.

The economy may expand “slightly less” than 3 percent this year and growth may average 3.3 percent or 3.4 percent in 2015 “with some luck,” according to Osiatynski.

Fiscal Limitations

At the same time, the ability to spur recovery via government spending is limited as Poland has pledged to narrow next year’s budget deficit, he said. Promises by Prime Minister Ewa Kopacz this month to raise social spending don’t amount to “fiscal expansion” and are relatively modest, Osiatynski said.

“When we’re dealing with significant limitations in fiscal policy, then monetary policy is one of the few tools to use against economic weakness,” he said.

Derivatives investors are betting on almost two quarter-point rate cuts through January, with three-month forward-rate agreements trading 48 basis points below the Warsaw Interbank Offered Rate at 10:51 a.m. in Warsaw, data compiled by Bloomberg showed. The zloty lost 0.1 percent to 4.1990 per euro, extending this year’s slide to 1.1 percent.

While Osiatynski and Andrzej Bratkowski, a fellow monetary-policy maker, are pushing for significant easing, there’s a lack of consensus across the 10-person rate-setting panel.

‘Totally Mistaken’

Governor Marek Belka predicts one more cut and has called expectations for a series of reductions “totally mistaken,” according to an interview yesterday in the Gazeta Wyborcza newspaper. Adam Glapinski sees no room for more easing, while fellow rate setter Elzbieta Chojna-Duch says it’s too early to determine future moves, the PAP news service reported.

Osiatynski said he’s concerned that euro-area lenders armed with liquidity from the European Central Bank may seek investments in countries that offer higher returns, with domestic lending unlikely to rebound amid poor consumer demand.

“This is one of the risks for Poland, a country with high political stability and a relatively high rate of return,” he said. “A difference of two percentage points between Poland and the euro area is enough to encourage inflows of short-term capital here.”

Another risk is inflation, which turned negative in July for the first time since the 1980s and has undershot the bank’s target band for 19 months. Consumer prices fell 0.4 percent from a year earlier in September, according to the median estimate in a Bloomberg survey of 33 economists. The data are due tomorrow.

“Data for September will probably show deflation and based on the central bank’s forecasts we won’t reach the lower end of the inflation target for several quarters,” Osiatynski said. “If these fundamental trends hold, and nothing suggests they’ll reverse, then I believe we can cut interest rates further.”

To contact the reporter on this story: Piotr Skolimowski in Warsaw at [email protected]

To contact the editors responsible for this story: Balazs Penz at [email protected] Andrew Langley, Agnes Lovasz

Euro zone needs 'grand bargain' of QE, fiscal easing – Poland's Belka

By Marc Jones and Patrick Graham

LONDON (Reuters) – The euro zone needs a “grand bargain” between Germany and France to allow substantial new fiscal and monetary stimulus to revive its economy, the head of Poland’s central bank said on Monday.

Marek Belka, previously the International Monetary Fund’s European head, also said he was comfortable with market expectations of another 50 basis point cut to Poland’s already record low 2 percent benchmark interest rate before the end of the year.

Poland has been one of the few European economies to escape recession since the euro zone’s debt crisis erupted five years ago, but with the economy of its main trade partner Germany stumbling, concerns are mounting again.

“It is very hard to be optimistic,” Belka, returning from the IMF’s meetings of global financial leaders in Washington, told Reuters in the interview. “The mountain of debt is not decreasing, deleveraging in the banks is going on at full speed, so you need something more than just muddling through.”

He said that even maximum estimates of around 1 trillion euros ($ 1.3 trillion) attached to the ECB’s current plans for new targetted cheap loans and purchases of packaged debt would not suffice.

It would only take the ECB’s balance sheet back towards where it was a year ago, and not provide the additional boost Europe needs, he said.

“Doing more would mean buying government bonds. Maybe it could be possible as part of a bigger package, a ‘grand bargain’. The French defy French identity, French tradition, the Germans do the same and we save the euro,” he said.

“Even if we are not talking about an existential threat to the euro, something has to happen to give the euro zone a push out of stagnation. It is not a rosy picture.”

Asked whether he was comfortable with the further half percentage point in Polish rate cuts markets have moved towards pricing in by the end of this year, Belka simply said: “Yes.”

“But of course what happens depends on a number of factors including the next central bank inflation projection (in November).”

(1 US dollar = 0.7889 euro)

(Editing by Ruth Pitchford)

Poland cuts interest rates sharply to counter Ukraine, euro zone troubles

* Central bank cuts benchmark rate by 50 bps to 2.00 pct

* Analysts had predicted a smaller cut

* Bank narrows corridor between rates

* First cut in 15 months to fight fall in consumer prices

* Central bank to hold news conference at 1400 GMT (Adds details, analyst quotes)

By Pawel Florkiewicz and Marcin Goettig

WARSAW, Oct 8 (Reuters) – Poland’s central bank cut interest rates by a deeper-than-expected 50 basis points on Wednesday, a resumption of easing forced on it by the spillover from the euro zone’s stuttering recovery and the crisis in Ukraine.

The return to rate cuts in eastern Europe’s biggest economy after a 15-month pause was a response to falling industrial output and a deep drop in consumer prices, partly the result of a glut of food products that are barred from export to Russia.

The bank’s Monetary Policy Council (MPC) cut the benchmark interest rate to 2.00 percent, a new record low. That was deeper than the 25 basis point cut that most analysts polled by Reuters had been predicting.

“The surprise is surely the size of the reduction in the benchmark rate,” said Adam Antoniak, economist with Polish lender Pekao. “It seems the Council is trying to make up for lost time.”

After the decision, yields on Polish 10-year benchmark bonds dropped initially by 9 basis points to 2.81 percent, an all-time low, and later rebounded slightly. The zloty was slightly weaker.

A clearer picture of whether Wednesday’s cut is the start of an easing cycle or a one-off adjustment could come at 1400 GMT, when the bank is due to issue a statement and hold a news conference to explain its decision.

“It seems the bank’s rate cut prepares the ground for more easing,” said Grzegorz Ogonek, an economist at ING Bank Slaski.

The bank also adjusted its deposit and lending rates, narrowing the corridor between them. The deposit rate was left unchanged at 1.0 percent, while the lending rate, called the lombard rate, was cut by 100 basis points to 3.0 percent.

BUMPY RECOVERY

Poland’s $ 508 billion economy slowed slightly in the second quarter of this year, hit by a slump in Germany, a major buyer of Polish goods and services, and tit-for-tat sanctions between Europe and Russia stemming from the crisis in Ukraine.

Economic growth, at an annual 3.3 percent in the second quarter, is still higher than the average euro zone rate of 0.7 percent. Poland has been buoyed by robust growth in domestic demand and unemployment is at a four-year low.

Analysts polled by Reuters before Wednesday’s decision expected the bank to cut its main rate further in the coming months, bringing it to 1.75 percent by the end of the first quarter of 2015.

Markets are slightly more aggressive, pricing in a fall to 1.50 percent over the same period.

Poland, which does not use the euro, is the only economy in Europe to have avoided recession after the 2008 global financial crisis. It came close though, prompting the central bank to cut rates by 225 basis points in a cycle that lasted from October 2012 to July last year.

The fact that the central bank is returning to easing now is an acknowledgment that the recovery is not progressing as policy-makers had hoped — albeit largely because of factors outside Poland’s borders.

In Germany, which accounts for 25 percent of Polish exports, industrial output plunged at its steepest rate since the height of the financial crisis in August. Prolonged weakness in Germany would mean lower demand for Polish imports.

A Russian embargo on imports of Western foodstuffs has hit Poland especially hard. The domestic market has been flooded with cut-price apples, for instance, because Polish farmers’ usual export market is now closed off to them.

Economists said the rate adjustments may be intended to give the central bank space to further cut the benchmark rate.

A sharp reduction in the benchmark rate could have the knock-on effect of pushing the deposit rate below zero, a threshold that would signal Poland had entered the realm of unconventional monetary policy, something it has tried to avoid.

Narrowing the corridor allows the benchmark rate to come down further without pushing the deposit rate into negative territory.

(Reporting by Pawel Florkiewicz and Marcin Goettig; Writing by Marcin Goettig; Editing by Ruth Pitchford)