USDPLN rose by just under 1% from low-to-high to touch a three-week high yesterday as the zloty weakened in the buildup to the National bank of Poland’s policy decision, with markets anticipating no policy expectations and continued dovish communications by the NBP. The decision perfectly fulfilled the expectations of a placeholder meeting, making markets wonder why it took the central bank longer than usual to come out with their decision.
The key policy rate was kept unchanged at 0.10% while the Council also downplayed April’s surge in inflation from 3.2% YoY to 4.3% YoY. The NBP stated the print was primarily driven by the year-on-year growth in crude oil prices, with oil futures dipping to negative territory in April 2020. It did acknowledge that inflation will likely remain above the upper band of the target range of 2.5% +/1pp in the near future, but once transitory effects fade, inflation should move back to the target level.
We agree with the Council that April’s inflation print should be taken with a pinch of salt.
Base effects and transitory factors will distort inflation figures for the time being until economies start to move out of the pandemic induced recessions. Because of the distorted prints, however, it will be difficult to distinguish signals from noise in the inflation data. As the economy opens up over the next months and the gap between data from this year and last year becomes increasingly larger, it will be harder to gauge the source of inflation. For this reason, the NBP has every reason to remain cautious and consider the upside risks to inflationary pressures going forward as the peak may be yet to come. Where other central banks in the CEEMEA region have become more hawkish over the past month or two, with some being forced to hike rates already due to the inflationary pressure on their currencies, the National Bank of Poland has maintained a dovish approach similar to that of the Fed and the ECB as it prioritises growth until further out in the recovery phase.
FX intervention has been on the list of topics for the press conference since Q4 2020, when a bout of PLN strength to around the 4.45 level against the euro resulted in the central bank selling its currency in markets. Since then, the NBP mentioned it will continue to monitor the exchange rate and that currency intervention is not off the table. It lost some relevance when the third Covid-19 wave in Poland hit a peak in March, forcing the government to tighten measures until midway through April. The surge in cases and following tightening were paired with a weakening of the zloty, which hit a high of 4.6804 against the euro, reducing the need to intervene in currency markets. Although the zloty has regained some ground since, it still continues to trade well above levels the NBP previously intervened at, making it challenging to justify FX intervention at this stage. Despite this, the NBP still included the FX intervention line in their press statement, and they will likely continue to do so until further out in the recovery stage.
Looking ahead, we think the NBP will continue to downplay the overshoot in inflation while prioritising growth, but the risk remains that inflation overshoots at higher levels or for longer than the NBP initially anticipated.
Zloty weakens ahead of NBP meeting, but press statement failed to excite markets
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