Moderate optimism on the part of the MPC

As we expected, the Monetary Policy Council has not changed interest rates today (the reference rate amounts to 0.10%). In the statement numerous changes were introduced highlighting the dynamically changing situation home and abroad. The Council pointed out i.a. the improvement of economic climate in Q3 but expects GDP dynamics to decrease in Q4. In the Council’s view “the sharp increase in the number of new COVID-19 infections along with the tightening of the epidemic restrictions and weakening sentiment of economic agents in October and November contributed to the deteriorating economic conditions in recent period, especially in the service sector.” According to the statement, the MPC expects that the economic activity will rebound next year, but the GDP will probably remain lower than prior to the pandemic. Like in November, the statement emphasized the positive impact of the economic policy measures, including the easing of NBP's monetary policy, on domestic economic situation. The Council indicated however that the pace of economic recovery would be limited by increased uncertainty and weaker sentiment of economic agents than in previous year with the lack of “a visible and more durable zloty exchange rate adjustment to the global pandemic-driven shock and to the monetary policy easing introduced by NBP”.

In accordance with the statement, the NBP will continue to purchase government securities and government-guaranteed debt securities on the secondary market as part of the structural open market operations (the value of the securities purchase so far has reached PLN 105.5bn).

The likelihood of monetary easing has significantly decreased

At the beginning of last month we painted a scenario in which in response to the expected by us introduction of a hard lockdown and the resulting deterioration of the outlook for economic growth and reduction of anticipated inflation, the MPC would ease the monetary policy in November or December (see MACROpulse of 6/11/2020). This forecast was conditional and depended on further course of the COVID-19 pandemic. When formulating it we were guided by the forecasts of the ICM Epidemiological Model that was prepared by the Warsaw University staff and signaled that the number of new identified COVID-19 cases would exceed 30k in the second half of November. However, the actual course of the pandemic in recent weeks proved to be much milder from the ICM model-based forecast presented at the time. The forecast error was probably caused by changes in the testing rules and lower propensity of Poles to take tests. Lower number of confirmed COVID-19 cases resulted in the lack of “national quarantine”, namely of hard lockdown. It should be pointed out that since then the number of new infections in the horizon of several weeks forecasted by the ICM model has been revised downwards.

We believe that given no hard lockdown which would have adversely affected the economic growth rate, the MPC will not decide to ease the monetary policy further. We still see a slight risk of the materialization of a scenario in which the MPC will use unconventional tools designed to support the investment activity of enterprises. However, the visibly better than expected data on investments in enterprises employing at least 50 persons (see MACROmap of 30/11/2020) and gross fixed capital formation in the whole economy for Q3 2020 (see MACROpulse of 30/11/2020) make such scenario less likely to materialize. At the same time, we maintain our forecast that the first hike of the NBP reference rate (from 0.10% to 0.25%) will take place in November 2022. This scenario is supported by very high GDP dynamics in 2022 expected in the November NBP projection (see MACROpulse of 6/11/2020).

The text of the statement after today’s meeting of the Council is neutral for PLN and bond yields, we believe.

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