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 assessed that “over the near term, a further recovery in economic activity can be expected” supported by “further loosening of the pandemic-related restrictions and economic policy measures, including monetary policy easing”. The Council repeated the view 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”.

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 93.8bn). 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 concerned about slight depreciation of PLN

Especially noteworthy in the statement after the MPC meeting is the fragment added by Council about the impact of the changes in zloty exchange rate on the pace of the economic recovery. In the Council’s opinion, this pace can be mitigated by “the lack of visible zloty exchange rate adjustment to the global pandemic shock and to the monetary policy easing introduced by NBP”. We addressed the issue of the exchange rate strengthening recorded in recent weeks which limited the scale of its weakening compared to the level observed before the outbreak of the pandemic in MACROmap of 8/6/2020. In our view, the low scale of PLN depreciation between February and June 2020 results from the relatively weak (compared to the US and Eurozone economies) monetary policy easing in Poland and from higher global demand for risky assets due to the gradual lifting of the COVID-19-related restrictions and the resulting improvement of short-term economic outlook in many countries.

NBP currency intervention is unlikely

The above quotation points to the Council’s concern about the fact that the exchange rate channel in the monetary policy transmission mechanism is inefficient. A consequence of inefficient exchange rate channel is a smaller (albeit positive) impact of the so-far interest rate cuts on demand and inflation. However, in our view, the language used by the Council does not signal a higher likelihood of a foreign exchange intervention aimed at a sustained weakening of PLN. We believe that if the Council’s intention was to signal its readiness to make such intervention, its tone would have been stronger and the Council would have surely pointed to an excessive deviation of zloty exchange rate from a level justified by the current and the expected level of economic activity (so-called equilibrium rate). In our view, considering the uncertainty about the estimates of the equilibrium exchange rate, a currency intervention would only be justified in a scenario of a strong overvaluation of zloty which is not the case now. However, we are not ruling out a currency intervention by the NBP in the event of a further fast appreciation of PLN.

The rationale of the MPC decision is slightly negative for PLN

The signaled by the Council lack of visible zloty exchange rate weakening in reaction to the sharp deterioration of the outlook for economic growth supports our scenario in which at its July meeting the Council will introduce so-called forward guidance, namely the announcement of keeping the NBP reference rate close to zero for an extended period of time (see MACROmap of 8/6/2020). We maintain our view that further monetary easing, if any, will be of an unconventional nature. We expect the Council to wait with the decision on using next unconventional tools at least until autumn 2020. If there is a second wave of the COVID-19 epidemic and the accompanying it increase in uncertainty as well as deterioration of the investment climate, the Council might decide to take measures aimed at stimulating lending and demand similar to those that were taken in recent years by the central banks conducting the monetary policy amid interest rates that are close to zero. We maintain our forecast in which the first interest rate hike will take place in November 2022 (see MACROmap of 8/6/2020).

The text of the statement after today’s meeting of the Council is slightly negative for PLN, we believe.

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