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Poland’s central bank reduced its benchmark interest rate yesterday by 25bps to a two-year low of 4%.

The cut is less than most of us in global macro-land estimated, particularly given the recent tone of news flow coming out of Eastern Europe. However, the lower scale of the cut signals that the central bank is worried about further contractions to an already depreciated Zloty: the currency has lost 12.8% versus the Euro and 24.3% versus the dollar in this year alone. Bloomberg purported that the Zloty was the worst performer of the 25 emerging market currencies it follows.

Polish Central Bank Governor Skrzypek said the economy should grow 1.7% this year from 4.8% in 2008. Industrial output fell 14.9% in January (the biggest decline in 20 years) and unemployment stands at 10.5%, the highest in 9 months. So we’ll take the under on Skrzypek’s estimate.

The central bank is surely wrestling with the balance between cutting rates to stimulate the economy and raising rates which would dampen economic growth but protect the Zloty. The balance is one that much of Eastern Europe is presently struggling with. Already Eastern European central banks are signaling that they may raise interest rates when they next meet to defend their currencies in the face of mounting Euro and Swiss Franc denominated loans which they owe Western European banks and the IMF.

One way to play Eastern Europe on the short side is via the GUR etf.

Matthew Hedrick

Andrew Barber