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The third and the last cut in interest rates

MPC has cut interest rates again

As we expected, the Monetary Policy Council decided to cut interest rates. The NBP reference rate was reduced by 40 bps (from 0.50% down to 0.10%) and the lombard rate decreased by 50 bps (from 1.00% to 0.50%). According to the assessment presented in the press release after the meeting, the main reason for the cut was the continuing risk of inflation falling below the MPC inflation target in the monetary policy transmission horizon. According to the MPC, this risk is due to the outbreak of COVID-19 epidemic which contributed to a fall in global and Polish economic activity and to falling fuel prices. The Council believes that “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”. In the Council’s opinion, “monetary policy easingalleviates the fall in employment and deterioration of financial situation of enterprises, thus being conducive to quicker recovery after the abatement of the pandemic”. The view presented by the MPC is in line with our scenario, in which the impact of increased uncertainty related to the pandemic has a strong negative impact on demand (including investments), which requires further monetary policy easing despite the so-far significant easing of the fiscal policy (see MACROmap of 4/5 and 25/5/2020).

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 85.6bn). 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.

MPC: the rates cut will favourably affect financial stability

Especially noteworthy in the statement after the MPC meeting is the fragment concerning the impact of the interest rates cut on financial stability. In the Council’s opinion “measures undertaken by NBP - due to their positive impact on financial situation of debtors -- are conducive to enhancement of financial system stability”. This means that despite the negative impact of lower interest rates on the financial results of the banking sector and – indirectly – on the growth rate of the banks’ capitals and loan supply, the MPC believes that the favourable effects of the so pursued monetary policy (lower scale of the deterioration in the quality of the bank’s loan portfolio) due to lower debt service costs for enterprises and households and the stabilization of their financial situation thanks to financing obtained under the “anti-crisis shield” and “financial shield”, more than make up for the negative impact of the close-to-zero interest rates on the banking sector’s financial result and capital.

Rate cut is slightly negative for PLN

Today’s MPC decision and the text of the statement after the Council meeting are slightly negative for PLN. In our view, today’s MPC decision ends the cycle of interest rate cuts while further monetary easing, if any, will be unconventional. We expect the Council to wait with subsequent monetary policy decisions at least until autumn 2020. If there is a second wave of the COVID-19 pandemic, the Council may decide to take measures aimed at stimulating lending and demand similar to those taken in recent years by the central banks implementing monetary policy amid slightly positive or negative interest rates. We maintain our forecast in which the first interest rates hike will take place in July 2021.