Poland: Ultra dovish message from the NBP - Rabobank

While the National Bank of Poland left interest rates at record low of 1.50% as widely expected on Wednesday, ultra-dovish comments from Governor Glapinski sent the Polish zloty lower against the euro and the US dollar, notes Piotr Matys, EM FX Strategist at Rabobank.

Key Quotes

“A well-known advocate of keeping rates unchanged for an extended period of time, Glapinski indicated that the MPC may not deliver a hike until the end of 2019 or may even wait until 2020. On previous occasions he suggested that the already record long period of stable rates may end in the first half of 2019.”

“The latest inflation projection is the main source of Glapinski’s rising confidence that he may not have to adjust the accommodative parameters of the monetary policy (real interest rates are negative) perhaps for another two years.”

“The inflation trajectory has been revised modestly lower to 1.6-2.5% in 2018, from the previous forecast of 1.6-2.9%, and to 1.7%-3.6% compared to the November projection of 1.7%-3.7%. During the press conference Glapinski argued that the latest official projections reflect lack of substantial inflationary pressures.”

“That said, domestic economic environment is conducive for demand-led inflationary pressure to rise over the mid-term horizon in our view. Consumer spending rose 4.9% y/y in Q4 as Polish households continue to benefit from fast wage growth, record low unemployment and generous subsidies for families. Robust private consumption led to further acceleration in GDP growth to 5.1% y/y in Q4 from 4.9% in Q3. It is not only about consumption. Investment surged 11.3% y/y in Q4 mainly on the back of a new tranche of EU funds. Private investment should also pick up momentum due to strong domestic and external demand.”

“Given the solid underlying trend in the Polish economy and the risk that pressure on inflation may increase amid the ongoing tightening of the labour market and strong wage growth, it would be reasonable to expect that the MPC will be inclined to gradually raise interest rates. Yet, the wellbalanced growth is actually one of the main reasons Governor Glapinski continues to use to justify the preference for stable interest rates for as long as possible.”

“The market sent the Governor and other members of the MPC who share his view a warning signal that the strong commitment to stable rates could be a policy mistake.”

“Both EUR/PLN and USD/PLN spiked higher after Glapinski raised the prospect of unchanged rates perhaps until 2020. The former broke above the trendline resistance at 4.1935 validating the inverse head and shoulders technical pattern that has formed since the beginning of the year. The December high of 4.2252 is the next level to watch ahead of 4.26~. A sharp pullback below the February 26 low of 4.1641 is required to undermine the constructive shortterm structure in EUR/PLN.”

“A strong preference for stable rates in Poland and an increasingly hawkish tone from Fed officials, who may accelerate the pace of tightening this year, could trigger a bigger squeeze in USD/PLN in the coming months. So far gains have been capped below the resistance area at 3.4370/4240. A break higher would be a warning signal that the downside trend from the 2016 high could be at least partially reversed.”