Afternoon analysis 04.08.2016

The BoE loosened the monetary policy above market expectations. It pushed the pound significantly toward 5.05 against the zloty. The BoE decision didn’t significantly affect other major PLN pairs.

There were many dovish elements in the minutes and in the Mark Carney speech. The BoE decided to aggressively stimulate the economy with monetary measures and only negative interest rates were excluded from the toolbox at this moment.

Firstly, the interest rates were lowered to 0.25%. This move was widely anticipated. However, in the statement there was a suggestion that, “if the incoming data proves to be broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in the Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.”

This means that the benchmark will be probably lowered to 0.00% or 0.05% in the following months. Another element introduced by the BoE was an increase of the asset purchase program by 60 billion pounds. It was in the range of estimates if the QE were to be restored. However, it was not the base case scenario.

The BoE however, not only decided to increase the QE, but also announced the corporate bond purchase program worth 10 billion pounds. The amount is not huge, but it already opens another path to broader monetary stimulations. Finally, it is also worth mentioning the modified cheap loans to the economy (Term Funding Scheme), which is expected to be worth 100 billion pounds.

During the conference, Mark Carney, the BoE chief, said that, “all elements for the package have scope to be increased.” It means that the rates can go lower or the QE may be increased - especially if the economy performs below the BoE expectations.

In the Inflation Reports there was also the largest one-time reduction in the GDP projections in 20 years. The GDP growth for 2017 was reduced from the 2.3% y/y expected in May, to 0.8%. Moreover, the expectations for 2018 were reduced by 0.5 percentage points to 1.8% y/y.

The market impact

The reaction on the BoE decision is actually not surprising. The pound dropped, yields on UK gilts slid toward all-time-lows and stocks rose. Of course, there is one major question. How deep will the further depreciation be on both the GBP/USD and GBP/PLN? Today, the pound dropped by more than 1.5% against the dollar while the sterling lost aound 10 zloty cents against the PLN.

Firstly, due to the aggressive approach from the BoE, the odds of any significant rebound on the pound have been reduced. Additionally, the market will closely scrutinize incoming data. If they fail to show some improvement, the consumer demand drops, investments slide or the household sentiment is pushed lower, the pound depreciation will probably speed up.

In a negative scenario, the scale of monetary easing may quickly ramp up, which will put additional pressure on the sterling. As a result, the probability of a further slide on the British currency will increase. It is possible that the GBP/USD may even reach 1.25 level in the following months, while the GBP/PLN can be pushed toward 4.80 mark.

Other PLN pairs were fairly stable today and the situation should not change markedly in the following hours. The EUR/PLN is traded around the 4.30 level, which in our opinion is fairly close to the balanced rate taking into account both global and local circumstances.