Poland: NBP’s new FX focus limits downside for EUR/PLN near term but not permanently
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The National Bank of Poland (NBP) seems to have informally introduced an FX target of around 4.50 and increased the focus on economic growth.
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We have difficulty seeing the reasons for explicitly weakening the PLN given the solid export growth and sizeable inflation pressures. We do not expect the central bank to cut rates at next week's meeting.
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Nevertheless, we believe the NBP will seek to maintain the EUR/PLN around current levels until the crisis is over, by mid-summer at the earliest.
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As a result we raise our profile for EUR/PLN to 4.50 in 1-3M and then as recovery gets underway see the cross falling to 4.40 in 6M and 4.35 in 12M.
New explicit FX focus goes too far in our view
The NBP had a negative surprise for the PLN for Christmas, with the breaking of a Bloomberg news story that the central bank had intervened in the FX market to weaken the PLN, later confirmed by Governor Adam Glap iński. According to the governor, the intervention aimed to strengthen the impact of looser monetary policy on the PLN and the Polish economy as a whole. Further, late last week he hinted that while the central bank's benchmark interest rate is at the appropriate level a, rate cut would be in play if the economy were to worsen in Q1 20. This sent the EUR/PLN even higher, supported by comments from Monetary Policy Council (MPC) member Grazyna Ancyparowicz, who went as far as saying the ‘optimal' EUR/PLN rate to support the Polish economy was ‘4.50 or higher'.
This explicit focus on the PLN and economic growth by the MPC is new and noteworthy. Yes, there have been hints before but not to this degree. With the new FX and economic growth focus, the NBP is moving towards the Hungarian central bank's dovish approach. However, we have difficulty seeing the reasons for the NBP's desire to weaken the PLN. Yes, the economy has been hit like many other European countries by a resurgence in the number of COVID-19 cases, which has led to the imposition of new restrictions, weighing especially on service sector activity. However, industrial production and employment remain relatively strong, supported by newfound global manufacturing strength. With the rollout of vaccines (although Poland has been relatively slow in doing this), there is light at the end of the tunnel, as we expect the global and Polish economy to see stronger growth from Q2 onward.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
