National Bank of Poland surprises (Afternoon analysis 28.05.2020)

In an unexpected move, the National Bank of Poland cuts the main interest rate by 0.4 percentage points to 0.1%. The zloty has so far been stable, but its potential weakening is "disguised" by exceptional positive sentiment and weakening of the dollar.

Closer and closer to 0. Negative rates will appear?

In a rather unexpected move, today, the National Bank of Poland (NBP) decided to cut the main (reference) interest rate by 0.4%, to 0.1%. The market consensus was to keep the rates unchanged at 0.5%. In a statement issued at 4:00 p.m., the NBP justified the decision by the risk of inflation falling below the target, which would be associated with lower global and Polish economic activity and low commodity prices.

The policy pursued by the National Bank of Poland is beginning to resemble the policy adopted, among others, in the eurozone or the USA, i.e. low rates and purchase of assets (bonds). The European Central Bank has introduced negative interest rates for a long time now, and the Chair of the Federal Reserve is still being asked about this possibility. The potential for introducing negative interest rates is also not far from the United Kingdom. The head of the Bank of England said on this matter that "no option is excluded".

After the NBP has reduced the rates by only one step from zero, the discussion on negative interest rates will probably also start in Poland. Although it seems to be a distant concept today, given the great uncertainty about the condition of the economies and the recovery path in subsequent quarters, it should not be ruled out.

This may weaken the Polish currency in the short term. Even before the pandemic, the zloty profited from a stable monetary policy and positive rates (1.5%), which slowly began to become a "luxury good" in the world. In the slightly longer perspective of the end of the year and the beginning of the next one, the condition of the Polish currency will depend on the shape of the economic recovery path to the state before the imposition of restrictions, as well as on global price trends in subsequent quarters.

Given the relatively high "starting point", if we do not observe low inflation (or even deflation), in a positive scenario of global recovery, the NBP may be one of the first central banks to consider raising rates, which should also support the zloty.

Positive surprise from the US helps the zloty

This unexpected decision of the National Bank of Poland weakened the zloty today, although the effect of the depreciation may be masked by very good market sentiment and increased supply pressure on the dollar in the afternoon. The EUR/USD quotations reached new highs since the last days of March (about 1,1060) after the publication of the weekly report on initial jobless claims. The data on the claims submitted last week, although still terrible, turned out to be in line with expectations and showed the number of claims submitted at 2.1 million. What came as a positive surprise, however, was the fact that for the first time since the beginning of the pandemic the level of recipients of these claims decreased: from 24.9 million to 21 million, which was about 4.6 million less than expected.

With the sentiment remaining positive (and a weaker dollar), today's NBP decision should not significantly change the valuation of the zloty against the main currencies. On the other hand, we may observe a slightly greater supply pressure, if the currently prevailing good sentiment reverses, e.g. due to growing geopolitical tensions between the US and China, and the dollar starts to strengthen again.

After the NBP statement, the EUR/PLN exchange rate went back to 4.44, and the USD/PLN exchange rate continued to move around 4.01-4.02. Although the undoubted pressure on the zloty's growth has decreased, it remains largely dependent on external factors. The prevailing positive sentiment in the market should rather prevent the zloty from greater depreciation, but already changing it may potentially weaken it more (than the NBP decision).