Polish Rate Cut Bets Sprout as Growth Slows: Chart of the Day

By Ewa Krukowska

Aug. 22 (Bloomberg) -- Investors are starting to switch their bets on Polish interest rates to cuts from increases, on signs economic growth is slowing and inflation is about to peak.

The CHART OF THE DAY shows the three-month Polish Forward Rate Agreement dropped below the three-month WIBOR interbank rate for the first time in more than two years, suggesting the central bank's monetary tightening cycle is nearing its end. The main rate is currently 6 percent, after the bank raised it by 2 points since April 2007.

``Forward rate agreements suggest that investors are starting to price in potential rate cuts as soon as this year,'' said Piotr Kalisz, economist at Citigroup in Warsaw. ``The move in prices was quite aggressive.''

The FRA, which settles to the three-month interbank offered rate for the zloty, traded at 6.34 percent yesterday, or 16 basis points below the WIBOR level of 6.50 percent. The contract has averaged 20 basis points above WIBOR since the central bank began its monetary tightening cycle.

The spread between the contract and the National Bank of Poland's main rate narrowed to 34 basis points yesterday, compared with an average 68 basis points in the past 17 months.

The Warsaw-based central bank may still increase borrowing costs by a quarter point this year to strengthen its anti- inflation credibility, Kalisz said. He forecast the reduction of borrowing costs will start next year, when he predicts rates will fall by 75-100 basis points.

To contact the reporter on this story: Ewa Krukowska in Warsaw at ekrukowska@bloomberg.net;