Afternoon analysis 22.01.2015

The European Central Bank finally launched a full blown quantitative easing. The central bank will buy up to 1.1 trillion euro in assets. First reaction of markets is rather positive.

As expected, the European Central Bank decided to introduce a full blown quantitative easing – asset purchases program that encompasses government bonds. The program is to begin in March and continue through September 2016. The ECB will buy 60 billion euro assets a month – thus the overall securities amount that is to be bought completes to 1.1 trillion euro.

This amount is in line with unofficial leaks from the central bank, that were published by major information agencies. In addition, the ECB decided to leave major rates unchanged.

Pivotal issue was a way to handle possible losses on debt of countries with tensions in public finance. This issue was brought out by the Bundesbank. To address it the ECB decided to share the risk only of 20 percent of purchases.

Long lasting idleness

Since the crisis hit in 2008, the US Federal Reserve and the Bank of England due to introduction of quantitative easing, managed to lower the unemployment rate to levels preciously seen before the economic collapse. In the meantime, the ECB was unwilling to employing unconventional tools. Given ECB inaction, there was mounting criticism of its stance, that resulted in a poor GDP growth and other major growth indicators. The pressure increased after deflation occurred in the beginning of 2015.

The ECB in mid 2014 started to employ new measures to spur credit action. It introduced negative interest rates, two TLTRO tenders (aimed at providing credit to the real economy|) and private assets purchases. The full QE will become a catalyst for measures introduced earlier.

Today's ECB decision was not unanimous – the Bundesbank was against bond buying. The German central bank stated that a similar action will create wrong incentives for euro zone government with troubled public finance. A particular country will use money obtained due to ECB intervention not to facilitate reforms but rather to avoid them.

The outlook for the zloty

The first reaction of investor on ECB actions is rather positive for risky assets. Given that, the odds for zloty gain in the short term were increased. However, market participants will have to digest the overall impact of ECB decisions in a broader scope that encompasses the latest decisions of the SNB (that dropped the frank cap) and the Federal Reserve that is to increase rates in mid 2015.

If the positive reaction holds in a longer term, the outlook for the zloty will be quite positive. However, the scope for the zloty gains is limited to the EUR/PLN and the GBP/PLN. The USD/PLN and CHF/PLN will keep at high levels, as the dollar is poised to increase gain due to coming interest rates hikes in the US and the frank was strengthened after unexpected SNB decisions. The euro will also continue to drop against these currencies, what icnreases pressure on the zloty.