New restrictions in accordance with a “crawling lockdown” scenario

At the yesterday’s conference, Prime Minister M. Morawiecki announced the introduction of subsequent and numerous restrictions aimed at limiting the rate of increase of new cases of COVID-19. These measures include i.a. the closing of some shops in shopping malls, limitation of hotel activity, and switching to remote teaching in forms 1-3 in primary schools. Despite a significant toughening of the restrictions they are still less strict from those introduced in Spring 2020. The measures announced by the Prime Minister are in line with our scenario of a “crawling lockdown”, conducive to lowering economic activity in Q4 2020 and in the whole 2020 (see MACROmap of 26/10/2020). These measures are also consistent with our forecast, in which the GDP will decrease by 4.5% YoY in Q4 2020 due to lower dynamics of consumption, investments and contribution of net exports.

National quarantine is increasingly likely

The condition of introducing subsequent restrictions (“national quarantine”) with a scope similar to that recorded in April 2020 was also presented at the yesterday’s conference. This scenario can be described as “hard” lockdown and according to the Prime Minister it will be imposed when the 7-day average number of COVID-19 infections at the scale of the whole country will exceed 70 per 100k inhabitants. Now this average amounts to 55 but today it has for the first time exceeded 70. In our view, considering the anticipated increase in this number in the coming days, the introduction of hard lockdown in the first half of November is very likely. This scenario is strongly supported by the results of a forecast prepared on 28/10/2020 (namely without taking into account the impact of the closing of graveyards between 31 October and 2 November on the spread of the epidemic) by the Warsaw University employees using the ECM Epidemiological Model. They indicate that in the second half of November the number of newly detected COVID-19 infections will exceed 30k (against 27143 cases today) while the number of persons in hospitals will double and the number of persons in intensive care due to coronavirus infection will triple. Consequently, we see a significant downside risk to our forecast of economic growth in Q4 2020 (-4.5% YoY) and in the 2020-2021 period (-3.1% and 3.6%, respectively).

MPC is going to ease the monetary policy

We expect that, in response to the scenario outlined above, the Monetary Policy Council will ease the monetary policy in November or December 2020. The surprising decision to postpone the Council meeting from Wednesday to tomorrow enables the MPC members to assess the impact of subsequent restrictions announced by the government on the outlook for economic activity and inflation in the horizon of the latest November projection of GDP and inflation. We believe that the Council will decide to use unconventional tools of monetary policy. In our view, the spectre of these tools is limited. It covers i.a. negative interest rates, increased purchases of treasury or treasury-guaranteed bonds, the program of refinancing credit for enterprises (loans for banks at negative interest rate as the source of financing of cheap credit for enterprises) as well as forward guidance (declaration to keep low rates for an extended period of time). In our view, the most likely scenario is leaving interest rates at an unchanged level coupled with the use of one of the above listed tools. However, we do not rule out that MPC 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.

The expected by us monetary easing by the MPC will be slightly negative for PLN and bond yields.

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