NBP projection shows there is no room for further monetary easing

Interest rates remain unchanged

As we expected, the Monetary Policy Council (MPC) has not changed interest rates at its meeting today (the reference rate is 0.10%). In accordance with the press release, the MPC still expects the economic activity to recover in 2021, but further development of the pandemic-related situation in Poland and abroad remains the main cause of uncertainty with regard to the scale and pace of the recovery. Like in February this year, also the present press release emphasised a positive impact of measures taken as part of the economic policy, including the easing of the NBP’s monetary policy, on the economic activity. However, the Council maintained its opinion that the elevated uncertainty and the weaker sentiment of economic agents than before the pandemic combined with the “the lack of a visible and more durable zloty exchange rate adjustment to the global pandemic shock and to the monetary policy easing introduced by NBP” can slow the economic recovery down. In accordance with the press release, the message concerning the currency policy still applies, namely “the NBP may also intervene in the foreign exchange market to strengthen the impact of NBP’s monetary policy easing on the economy. The timing and scale of the measures taken by NBP will depend on the market conditions.”

In accordance with the press release, the NBP is going to continue to purchase government securities and government-guaranteed debt securities on the secondary market as part of structural open market operations (the value of bonds purchased so far is PLN 109.7bn).

NBP’s March projection: Inflation above the target. Economic recovery clearly stronger

In line with the NBP’s March projection prepared under the assumption of unchanged NBP interest rates, there is a 50-percent probability that the annual price growth will be in the range of 2.7–3.6% in 2021 (against 1.8–3.2% in the November 2020 projection), 2.0–3.6% in 2022 (compared to 1.6–3.6%) and 2.2–4.2% in 2023. This means that in 2021-2023 the inflation expected in the projection is most likely to run above the MPC’s inflation target of 2.5%, but below the upper limit for admissible deviations from the target (3.5%). At the same time, the GDP growth – according to this projection – will be with a 50-percent probability in the range of 2.6–5.3% in 2021 (against 0.8–4.5% in the November 2020 projection), 4.0–6.9% in 2022 (compared to 3.8–7.8%) and 4.0–6.8% in 2023. The projected inflation suggests economic growth close to 4% in 2021, while the following years will see a much stronger growth combined with an increased inflation pressure. However, it needs to be emphasised that the March projection takes into account the data available until 16 February. This means that the third wave of the COVID-19 pandemic that is currently observed in Poland carries a downward risk for the GDP and inflation outlook in 2021 as presented in the projection. In our opinion, the NBP’s March projection is quite likely to fail to take into account the inflow of EU funds transferred as part of the EU Recovery Fund, which has not been ratified by some of the EU Member States yet. This is indicative of a significant upward risk for projected GDP and inflation growth paths for 2022-2023 (we will analyse the macro-economic impact of the National Recovery Plan in the next MACROmap). It will be possible to verify this hypothesis when the NBP publishes its March Report on Inflation.

No room for further monetary easing

NBP’s March projection results show that the monetary policy will not be eased further despite the third wave of the COVID-19 pandemic that is currently observed in Poland. We maintain our scenario, in which the MPC will not change interest rates by the end of 2022. We expect the reference rate to be raised for the first time in Q1 2023 (from 0.10% to 0.25%). In accordance with that scenario, the MPC will be tolerating potential upward deviations of inflation from the target in 2021-2022 as it will want to avoid a strong appreciation of the PLN as a result of the interest rate differential between Poland and the Eurozone. Our mid-term NBP reference rate forecast is consistent with the expected course of the monetary policy of the European Central Bank, whose balance sheet total, though expected to stabilise in 2022, will fall significantly in early 2023.

In our opinion, the press release following today’s meeting of the Council is positive for the PLN and for the bond yields.