Will Poland's MPC join the easing party?
Polish Economy and Financial Market
In February's MACROscope:
The global market turmoil that hit at the beginning of the year has continued, fuelled by concern not only about emerging markets and the state of the global economy, but also about the shape of the financial industry. Against this shaky backdrop, central banks have moved centre stage to provide real or potential stability. We have seen a dovish rhetoric from the ECB, monetary policy easing by the Bank of Japan and a significant adjustment in expectations as regards the Federal Reserve's actions (no hike expected in March and only a moderate chance of a move in 2016 as a whole). In this global context, local Polish factors continue to add uncertainty rather than diminish it, although the new government has made only limited progress since our previous report (continuing work on child benefits, still uncertain shape of the planned retail tax).
The zloty partly recovered from its poor start to the year, with EUR/PLN falling temporarily to 4.37. This was mostly due to dovish signals from global central banks. However, the respite proved only temporary, as another burst of global risk-off sentiment sent the Polish currency back above 4.40 against the euro and left it underperforming Central and Eastern European peers. This was accompanied by a widening of the yield spread vs. Bunds and of the asset swap spread, suggesting a higher risk premium. With their slightly higher yield, Polish long-term Treasuries drew strong demand from both foreign and national investors at February's auction.
Global market uncertainty affecting the zloty, together with some local risks and looser fiscal policy, should be solid arguments for the new Monetary Policy Council (MPC) to keep rates on hold. However, the inflation outlook has recently changed substantially and deflation is now likely to last much longer than previously predicted. This will be reflected in the central bank's inflation projection, due ahead of the next MPC meeting in March. New council members are proving not to be excessively dovish, which points to a continuation of monetary policy. That said, they have acknowledged the importance of the NBP's projection. Interestingly, the date of the March MPC meeting has been changed to after the ECB meeting, not before. A significant signal by the ECB might have impact on the MPC, although we think the Polish rate-setting panel needs to balance arguments a bit differently (especially given local risk factors).
One of the concerns affecting Polish assets is the impact on the banking system of suggested ways to fix the problem of CHF-denominated loans. In March the Financial Supervision Authority (FSA) is expected to provide estimates of bank losses if these FX mortgages are converted as proposed by President Duda. The latest NBP report showed the proposal's direct cost to the banking sector would be PLN44bn, which could threaten the sector's stability. The FSA will probably confirm these estimates, which would be a strong argument to overhaul the bill significantly.