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MPC is economical with optimism

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 slightly changed compared with the July statement: “the scale of the expected recovery in activity may be limited by uncertainty about further course and effects of the pandemic, lower income growth and weaker sentiment of economic agents than in previous years” (“further course” is a new element compared with the July statement). 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”.

Increased uncertainty justifies 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 103.3bn). This is in line with our expectations (see MACROmap of 14/9/2020). In our view, the continuation of these operations is justified in the light of high uncertainty about the second wave of the COVID-19 pandemic and high borrowing needs of the public finance sector despite the expected drop in the deficit of this sector in 2021. Consequently, the structural open market operations will also stabilize PLN, which is in line with our forecast of EURPLN falling to 4.37 at the end of 2020.

MPC is economical with optimism

Contrary to our expectations, the MPC has not mentioned in the statement the better-than-expected data on GDP in Q2. Coupled with the macroeconomic data for July 2020, they signaled that GDP decrease in the whole 2020 would be markedly lower than expected in the NBP July projection (see MACROmap of 14/9/2020). On the one hand, it indicates that continuing uncertainty about the economic effects of the anticipated second wave of COVID-19 has prevented the Council from providing more optimistic assessments of the prospects for economic growth in 2020. The evidence of this may be the above quoted reference to ”further course of the pandemic”. On the other hand, today’s statement does not repeat what has been said in the July statement, namely that the economic activity “continues to be lower than before the pandemic” (we believe that it is still the case). This would suggest that the NBP is more optimistic in assessing the level of GDP in Q3. Thus it is hard to find in the statement any clear signals pointing to a change in the MPC bias in monetary policy. This supports our scenario in which the Council will not decide to introduce unconventional tools of monetary easing and the first hike of the NBP reference rate (from 0.10% to 0.25%) will take place in November 2022 (see MACROmap of 14/9/2020).

The text of the statement after today’s meeting of the Council is neutral for PLN and bond yields, we believe.