MPC reduced the reference rate by 50 bp
In line with our expectations, the Monetary Policy Council lowered the reference rate from 1.50% to 1.00%. According to the assessment presented in the press release after the meeting, "expected economic slowdown in the nearest future together with the significant fall in global oil prices will contribute to marked decrease in inflation". As a result, the Council assessed that the probability of inflation in 2020 falling faster than expected in the March projection and of inflation falling below the MPC inflation target (2.5%) in the monetary policy transmission horizon has increased. In Council's view, the main factor contributing to the deterioration of the outlook for economic growth in Poland is the outbreak of the COVID-19 epidemic, which in the short term will contribute to the fall of economic activity of some sectors. MPC emphasized that the decline in economic activity in Poland would be aggravated by a simultaneous decline in activity in many countries. The Council's expectations regarding inflation outlook are in line with our latest macroeconomic scenario (see MACROmap of 16/03/2020).
NBP will purchase treasury bonds
MPC also reduced the required reserve ratio from 3.5% to 0.5% and increased the remuneration of required reserves from 0.5% to the reference rate level (1.00%). That move, in the Council's opinion, should limit the risk of the impact of economic turmoil on credit supply. Reduction of required reserve ratio will increase the liquidity of the banking sector. In addition, the Council announced the purchase of treasury bonds on the secondary market by the NBP as part of structural open market operations, which is in line with the announcement of the NBP Management Board published yesterday. The Council expects that these operations will „change the long-term liquidity structure in the banking sector and contribute to maintaining the liquidity in the government bond secondary market ". In the statement after the meeting, the MPC did not present the schedule and scale of the bond purchase program.
In the fiscal-monetary orchestra, the government will play first fiddle
Taking into account the results of research on the transmission mechanism in monetary policy (the strength and lags with which it affects the economy), we assess that the combined impact of the announced NBP actions on aaggregate demand and inflation in the horizon of the coming quarters, including the effect of zloty depreciation, will be limited. It is also noteworthy that due to the expected stabilization of the NBP reference rate at 1.00%, the bond purchase announced by the MPC should not be seen as a program for quantitative easing of monetary policy. After the outbreak of the global financial crisis, such programs were pursued, are implemented now (ECB) or carried out again (Fed) by some central banks. Firstly, the programs of quantitative easing of monetary policy implemented so far were introduced after the exhaustion of the arsenal of conventional monetary policy tools, and thus after reducing the short-term interest rate to a level close to zero. Secondly, the MPC considered in its press release the announced purchase of bonds as an instrument whose purpose is to ensure liquidity on the bond market, and not to increase economic activity and inflation in the medium term. This means that today's MPC decisions should be seen primarily as measures to help the government carry out a large and effective fiscal expansion (a strong increase in the general government deficit due to reduced revenues and increased goverment spending), which will reduce the negative effects of the COVID-19 epidemic on economic growth in the years 2020-2021. The effect of this expansion will be a strong increase in the borrowing needs of the treasury, which will increase bond yields. In a government-NBP tandem, the first will be the clear leader in the context of measures taken in order to stimulate the economy.
Interest rates unchanged until the end of 2021
Today's MPC decisions and the press release after the MPC meeting support our scenario, according to which the NBP interest rates will not change at least until the end of 2021. They are at the same time slightly negative for the zloty exchange rate and bond yields. Information on the scale and time profile of the fiscal stimulus package prepared by the government will be crucial for the short-term prospects of the zloty and the debt market. The details of this package will likely be known in the coming days.