June 3, 2014 / 4:28 PM / 3 years ago

UPDATE 1-Poland's c.bank governor says rate cuts not ruled out

* Belka says rate cut cannot be excluded, but not likely

* Dovish comments slightly weaken zloty

* Bank says rates likely to remain at 2.50 pct until end-Q3

* Adds bank in no rush to adjust rates (Adds Belka quotes, details))

By Karolina Slowikowska and Marcin Goettig

WARSAW, June 3 (Reuters) - Poland's central bank cannot rule out cutting rates because of unexpectedly low inflation, governor Marek Belka said on Tuesday, in a shift in language from two months ago, when he had said rate cuts would be a "deadly sin".

Belka, speaking after the bank's Monetary Policy Council left rates unchanged at 2.50 percent, said the bank was in no rush to adjust policy and would most likely keep rates steady until September.

The new language on rate cuts appeared to signal that the balance on the 10-member Monetary Policy Council had moved in favour of easier policy.

"Inflation is surprising us. So the deadliness of this sin would now seem lower," Belka said at a news conference.

However, Belka added that a rate cut was a scenario "with a low probability" as growth was strong.

Poland, the largest economy in central and eastern Europe, has been recovering over the past few quarters with growth reaching an annual 3.4 percent in the first quarter.

But growth in manufacturing activity almost ground to a halt in May, data showed on Monday, tempering optimism about the recovery.

The bank said in its policy statement on Tuesday that it would keep rates on hold until the end of the third quarter of 2014, changing the wording from the previous month's communique to remove the words "at least".

The bank added that a more comprehensive assessment of the policy outlook and "potential adjustment of interest rates" would be "possible after the Council gets acquainted with incoming information, including the July National Bank of Poland projection".

"ULTRA-LOW"

Inflation fell to 0.3 percent in April, far below the central bank's 2.5 percent target.

This increased market expectations of a rate cut in the coming months as the primary objective of the central bank in Poland is keeping inflation as close as possible to the target.

Belka added that, to a large extent, the "ultra-low" inflation was not due to domestic economic weakness and the central bank was in no rush to change its policy.

"(Low) inflation is to a large extent imported and one cannot say that it hinders the economic recovery," Belka said.

"In such a situation, any nervous moves that were to give inflation an impulse would be, first of all, inefficient, ineffective, and, second, rather unwise."

The Polish zloty has gained more than 1 percent in the last two weeks on expectations that monetary policy in Poland and the euro zone could diverge.

An expected rate cut from the European Central Bank on Thursday would boost the relative attractiveness of the Polish currency.

Further gains in the zloty would in turn reduce the price of imported goods, pushing Polish inflation even lower, and make exports less competitive, possibly making the Polish central bank more willing to cut rates.

Asked about the zloty, Belka restated the bank's official policy that Poland has a free-floating currency but the central bank could intervene if volatility was too high.

Polish rates are now among the highest in the region. Hungary has cut its key rate to 2.4 percent, while the Czech Republic has slashed rates to almost zero and is intervening to weaken the crown. (Reporting by Karolina Slowikowska; Writing by Marcin Goclowski; Editing by Christian Lowe and Kevin Liffey)

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