Afternoon analysis 11.03.2016:
The European Central Bank spurred volatility in the markets. Risk appetite was strengthened. The zloty exploited a positive market sentiment to gain against its major pairs.
Yesterday, the ECB presented a very aggressive stance. The Frankfurt-based institution decided to use stronger tools than expected. The actions taken by the ECB will shape the financial markets and the economic developments in the long term.
On Thursday, the ECB surprised in every aspect of the monetary policy. It cut all interest rates and expanded the asset purchase program which will now include corporate bonds. Moreover, it will conduct four cheap credit auctions (TLTRO II), even at negative rates for eligible banks.
Initially, the financial market reaction was in line with earlier expectations. The euro dropped and the demand for risky assets was stronger. However, later the tendency reversed and the volatility increased. The suspected factor seen as responsible for similar developments were the remarks made by ECB President Mario Draghi during his press conference. Draghi suggested that deeper interest rate cuts are not very likely.
However, Friday's session was in line with the expected scheme. The euro's drop was coupled with rising stock indexes. The major European stock indexes increased more than three percent. Moreover, commodities gained and the emerging market currencies were stronger.
The Monetary Policy Council decided to leave interest rates unchanged. Currently, the cost of credit is set at 1.50 percent - the lowest level in history. Last time the interest rates were changed was a year ago. In March 2015, the MPC cut interest rates by 50 basis points.
A few months ago, there were expectations for interest rate cuts. However, currently the basis scenario is for leaving rates unchanged.
Two factors may alter the market consensus. The first, is the ECB's recent actions that will support the zloty in the long term. Earlier, the zloty's weakness was an argument to leave rates unchanged. This factor was, however, depreciated.
The second factor will be the forecast from the NBP scheduled on March 15. If the projection signals that the inflation rate will remain subdued in the mid term, the MPC may be pressured to act.
All in all, currently the probability of interest rate cuts is very low. In the long-term, factors that will support the zloty will be the ECB’s loose stance and the expectations that the Fed will lower the pace of tightening.
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