MPC sees deterioration in economic conditions. Hard lockdown not factored in NBP projection

Interest rates unchanged, the Council sees a significant deterioration in economic conditions in Q4

As we expected, the Monetary Policy Council has not changed interest rates today (the reference rate amounts to 0.10%). In the statement numerous changes were introduced highlighting the dynamically changing situation home and abroad. The Council indicated that: “the sharp increase in the number of new COVID-19 infections in the recent period and the tightening of the pandemic restrictions will contribute to a further deterioration in the economic conditions in 2020 Q4”. In the Council’s view “domestic economic conditions will be held back by a decline in activity in the services sector, restrictions introduced in trade, increased uncertainty about the further course and effects of the pandemic and a deterioration in economic agents’ sentiment”. The Council has also noted the growing likelihood of an economic downturn in the environment of the Polish economy which together with the lack “of a visible and more durable zloty exchange rate adjustment to the global pandemic-driven shock and to the monetary policy easing introduced by NBP” will limit domestic economic activity. The numerous changes introduced in the statement indicate that the Council anticipates a significant negative impact of the second wave of the COVID-19 pandemic on the economic activity in Q4 2020.

In accordance with the statement, the NBP will continue to purchase government securities and government-guaranteed debt securities on the secondary market as part of the structural open market operations (the value of the securities purchase so far has reached PLN 105.2bn).

“National quarantine” not factored in the GDP and inflation projection

In accordance with the November NBP projection - prepared on the assumption of unchanged NBP interest rates - inflation will run with 50% probability between 3.4-3.5% in 2020 (vs. 2.9%-3.6% in the projection of July 2020), 1.8 – 3.2% in 2021 (vs. 0.3%-2.2%), and 1.6-3.6% in 2022 (vs. 0.6%-2.9%). This means that, according to the projection, inflation in the 2021-2022 period will run close to the MPC inflation target (2.5%). In turn, the GDP growth rate forecast in the projection will run with 50% probability between -4.1% - -3.0% in 2020 (vs. -7.2% - -4.2% in the projection of July 2020), 0.8%- 4.5% in 2021 (vs. 2.1%-6.6%), and 3.8% - 7.8% in 2022 (vs. 1.9% - 6.0%). Such GDP growth profile in the 2020-2022 period suggests that Polish economy will regain macroeconomic equilibrium (full capacity utilization) in 2022. It should also be emphasized that the November NBP projection does not take into account a hard lockdown (“national quarantine”) the introduction of which in November is very likely in our opinion (see MACROpulse of 5/11/2020). Consequently, following the introduction of a hard lockdown, the economic situation expected in Q4 2020 will further significantly deteriorate compared to the scenario outlined in the NBP projection. Noteworthy is also a low forecast of GDP growth in 2021 (central path at a level of ca. 2.7% vs. our forecast at 3.6%). Such low GDP growth path next year, combined with a very high anticipated economic growth rate in 2022 (5.8%), may mean that the NBP expects the strong impact of EU funds (including transfers under the EU Recovery Fund) no sooner than in 2022. The verification of this hypothesis will be possible after the publication of the November NBP Inflation Report.

MPC is going to ease the monetary policy

We maintain our view that, in response to the expected by us introduction of a hard lockdown and the resulting deterioration of the outlook for economic growth and lowering of anticipated inflation, the MPC will ease the monetary policy in November or December. The most likely scenario in our view is that the Council will use unconventional tools of monetary policy whiile leaving the reference rate at an unchanged level. However, we do not rule out that the Council will introduce negative interest rates. This option of monetary policy adjustment is supported by the view shared by most MPC members that interest rate cuts support the stability of the banking system (see MACROpulse of 5/11/2020). At the same time we maintain the forecast that the first hike of the NBP reference rate (from 0.10% to 0.25%) will take place in November 2022. This scenario is supported by the aforementioned very high GDP dynamics in 2022 expected in the November NBP projection.

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