Polish factory contraction slows amid improvement in Central European PMIs

Wed Oct 1, 2014 6:38am EDT
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By Gergely Szakacs

BUDAPEST (Reuters) - Manufacturers in the Czech Republic and Poland are doing better than expected, surveys showed on Wednesday, but activity in the region's largest economy still contracted, cementing expectations for a reduction in Polish interest rates next week.

Low inflation and an economic slowdown have encouraged some of the region's central banks to further cut interest rates already at record lows and launch measures to stimulate growth in the face of weaker European activity and the Russia-Ukraine crisis.

While a longer-term recovery remains on track, central Europe's economies are feeling the pinch from weakness in their main export markets and "the underlying cycle around the euro zone is unambiguously weakening," Commerzbank said in a note.

Poland, central Europe's biggest economy, is highly exposed to a sanctions conflict between the European Union and Russia over the latter's intervention in Ukraine. However, activity in Polish factories contracted at the slowest pace in three months in September.

The manufacturing PMI rose to 49.5 last month from 49.0 in August, data compiled by Markit and HSBC showed. Although still below the 50-mark which separates growth from contraction, analysts polled by Reuters had expected the PMI to fall further to 48.7.

Polish interest rates are among the highest in Europe with a base rate of 2.50 percent, above "junk"-rated Hungary's own 2.1 percent reached in July after an aggressive two-year monetary easing campaign to boost the indebted economy.

"In Poland the negative impact of economic sanctions against Russia could be much bigger (than in Hungary), because they export significantly more to Russia," said analyst Gergely Gabler at Erste Bank in Budapest.

Polish central bank policy maker Elzbieta Chojna-Duch told the Reuters Eastern Europe Investment Summit on Monday that excessive rate cuts may discourage saving and stoke asset bubbles, so the central bank should cut rates by 50 basis points in October and later see if more easing was needed.   Continued...