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Interest rates unchanged, unconventional tools still on the table

Interest rates unchanged

As we expected, the Monetary Policy Council has not changed interest rates today (the reference rate amounts to 0.10%). In the statement after the meeting the Council maintained the view that “a further recovery in economic activity can be expected over the coming months” supported by “an improvement in the economic situation in the environment of the Polish economy and the economic policy measures, including the easing of NBP's monetary policy”. The fragment about the impact of the COVID-19 pandemic on the economic outlook has been left unchanged: “the scale of the expected recovery could be curbed by uncertainty regarding the consequences of the pandemic, lower incomes and weaker sentiment of economic agents than in previous years”. The statement has also repeated the view that “the pace of the economic recovery could also be limited by the lack of visible zloty exchange rate adjustment to the global pandemic-driven shock and to the monetary policy easing introduced by NBP”.

The July NBP projection: GDP slump in 2020, marked increase in activity between 2021 and 2022

The inflation path in the 2020-2022 period, forecast in the July projection, has - compared to the March projection - been revised downwards. In accordance with the projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 2.9-3.6% in 2020 (vs. 3.1%-4.2% in the March projection), 0.3–2.2% in 2021 (vs. 1.7%-3.6%), and 0.6-2.9% in 2022 (1.3%-3.4%). This means that, according to the projection, inflation in the 2020-2022 will run below the MPC inflation target. Due to the strong negative impact of the COVID-19 pandemic on the economic activity in Poland, the trajectory of GDP growth rate has been significantly revised in the July projection. The GDP growth rate forecast in the projection will run with 50% probability between -7.2% - -4.2% in 2020 (vs. 2.5%-3.9% in the March projection), 2.1%-6.6% in 2021 (2.1%-3.9%), and 1.9%-6.0% in 2022 (1.8%-3.7%). Such GDP growth profile in the 2020-2022 period suggests that Polish economy will regain macroeconomic equilibrium (full capacity utilization) in 2022.

Continuation of structural open market operations

In accordance with the statement, the NBP will continue to purchase treasury securities and government-guaranteed debt securities on the secondary market as part of structural open market operations (the value of bonds purchased so far has reached PLN 101.3bn). This is in line with our scenario, in which the operations pursued by the NBP to ensure financing for the government “anti-crisis shield” and “financial shield” programs will be stabilizing yields on treasury securities amid strong increase in the borrowing needs of the State Treasury, the Polish Development Fund and Bank Gospodarstwa Krajowego. Consequently, these operations will also stabilize PLN, which is in line with our forecast of EURPLN falling to 4.37 at the end of 2020.

The NBP July projection results support our forecast of interest rates

The July projection paints a scenario of a fall of GDP in 2020 that is visibly deeper from the market expectations and our forecast (the central path indicates a decrease by 5.7%). We expect that the reason for such a deep fall of GDP in 2020 is the collapse of public and corporate investment activity expected in the NBP projection in Q2 and H2 2020. A fuller assessment of the structure of economic growth as forecast by the NBP will be possible after the publication of the Inflation Report. At the same time, the inflation profile anticipated in the projection indicates that in 2021 the rate of inflation will decrease significantly below the MPC inflation target (2.5%) and will stay below that target in 2022. This justifies the maintenance of an accommodative monetary policy for an extended period of time. Thus, the results of the July inflation projection strongly support our forecast in which the first interest rate hike will take place in November 2022 (see MACROmap of 13/7/2020).

Unconventional monetary policy tools are still on the table

A question arises why, despite inflation anticipated to run visibly below the MPC target in the 2021-2022 period, the Council has not decided today to further ease the monetary policy with the use of unconventional tools. This question is particularly relevant in the context of the statement after today’s Council meeting saying that “the measures undertaken by NBP reduce the risk of inflation falling below the NBP inflation target in the medium term”. It suggests that most MPC members do not identify themselves with the results of the July projection and the reason for this can be their uncertainty about the scale of inflationary pressure in longer term. An alternative explanation of the lack of the MPC reaction to the projection results can be its unwillingness to continue unconventional monetary easing without strong signals coming from the real economy and confirming the collapse of investment activity of companies. Despite no relaxation of the monetary policy by the MPC at today’s meeting, we maintain our scenario, in which the MPC will decide to use unconventional monetary policy tools. We now believe that the MPC is most likely to introduce so-called forward guidance, namely the announcement of keeping interest rates close to zero for an extended period of time, in September 2020 (see MACROmap of 13/7/2020). If there is a second wave of the COVID-19 epidemic and accompanying it increase in uncertainty and deterioration of investment climate, the Council may also decide to take measures aimed at stimulating lending and demand similar to those taken in recent years by the central banks conducting monetary policy amid interest rates close to zero.

The text of the statement after today’s meeting of the Council and the results of the July projection are slightly negative for PLN, we believe.