The rather limited EURPLN reaction after today’s central bank decision was perhaps not what the National Bank of Poland hoped for when they released their statement today, as the NBP has explicitly stated their preference over a weak zloty before and EURPLN had fallen by almost 2% since last Friday.
The NBP announced its monetary policy decision a couple of hours later than scheduled, which may have led markets to believe some sort of action was coming today, especially given the level EURPLN was trading at in the run-up to the announcement. EURPLN had been falling continuously since January 28, but today’s price action saw the pair recover some of its losses up until the rate decision.
Markets force push EURPLN below 4.5 and prompt the NBP to jawbone the zloty while maintaining rates at 0.1%
The statement contains no change of action as the NBP highlighted QE would continue to be open-ended and the central bank may further intervene in currency markets if required. The Council will also continue to offer bill discount credit aimed at refinancing loans granted to enterprises by banks. The central bank reiterated that economic activity in 2021 will increase but the scale of the recovery will mainly depend on the virus and the related restrictions, both domestically and abroad. The pace of economic recovery may also “be reduced by the lack of a visible and more durable zloty exchange rate adjustment to the global pandemic shock and to the monetary policy easing introduced by the NBP”. Meanwhile, inflation ended 2020 at 2.4% y/y, which is in line with the NBP’s target of 2.5% +/- 0.1%.
The NBP is likely to continue to focus on the exchange rate more heavily until the recovery phase is well underway, meaning that the distributions of vaccines, lifting of lockdown measures and risks of a third wave will be key to the outlook of the zloty as they determine at what level the NBP’s threshold is placed at.
Arguably, the lack of intervention explicitly announced at today’s meeting signals to markets that the NBP’s current threshold is at 4.45 on the EURPLN cross despite their last intervention occurring at 4.5 – a level the cross currently trades underneath.
Author: Ima Sammani, FX Market Analyst