Afternoon analysis 21.04.2016

The euro gained after the ECB released its policy decision. The MPC minutes showed a more dovish stance of the monetary authorities. The zloty posted severe losses.

As expected, the ECB left interest rates unchanged. The basis interest rate remained at negative 0.05 percent. This is the lowest level in history. Other policy tools also remained unaltered. The Frankfurt-based institution will continue to purchase assets worth 80 billion euros on a monthly basis and will pursue its cheap loans scheme as it was planned.

As usual, the most important event was Mario Draghi’s press conference. This time, Draghi disappointed the markets, as he did not outline a plan to introduce new measures and declined a discussion on "helicopter money.

Regarding the critique of the central bank’s loose policy, Draghi stressed the independence of the central bank and maintained the central bank acts within their mandates. The ECB chief said that the monetary policy is aimed at fulfilling the inflation target. Draghi said that according to the ECB staff estimates, the inflation rate would have been 0.5 percentage points lower if the measures were not introduced. When asked about interest rate cuts, he refrained giving a clear answer.

The euro's gain reflected the market disappointment. The EUR/USD growth was continued even after a surprisingly good report on the US labor market. The number of unemployment claims dropped to 247k - the lowest level since 1973.

Zloty weakness

The MPC sees the deterioration in the emerging economies as a risk factor to the developed countries. The monetary authorities cited China - where the economic outlook is still uncertain. The MPC sees low commodity prices as the major factor responsible for low inflation.

Reports from the first quarter indicated some deceleration according to the MPC's view. The monetary authorities stressed very good labor market conditions, despite rising employment and the stabilization of lower unemployment rate wages. The economy will stabilize in the coming quarter and may even accelerate. The 500 plus program will support consumption growth.

The deflation is caused by the external factors, thus it is beyond the impact of the MPC. Although the MPC sees no negative impact of deflation on the economy, there is the possibility of de-anchoring the inflation expectation, which would negatively impact the monetary policy’s efficiency. The MPC expects the inflation rate to return to a positive level by the end of the year.

Regarding the interest rate level, the MPC sees the current level as appropriate. As other countries lower rates, the steady level in Poland stabilizes the zloty and the asset prices. Nevertheless, the MPC does not exclude the possibility of interest rate cuts if the deflation gets worse if the economy slows down. It may suggest a more dovish stance.

The zloty posted severe losses on Thursday. The Polish currency gave away its recent gains. Currently, the zloty performs worse than other regional currencies.