NBP upwardly revises forecasts but remains dovish

Hawkish forecasts revisions for growth and inflation were not enough for the National Bank of Poland to change its dovish stance today. The NBP kept its rates unchanged at 0.10% as expected, while risks to economic growth from PLN appreciation was reiterated in the policy statement.

The new growth and inflation projections updated since November showed an improvement to the 2021 outlook and a slight uptick in price pressures, with 2021 growth expected to rise to 4.0% vs November’s 2.7% forecast and 2022 GDP nudged down from 5.8% to 5.5%.

This is in part due to the economy being generally more resilient to the second lockdown as evidenced by high-frequency data such as manufacturing PMIs, allowing Q4 GDP to remain firmer than the NBP’s expectations. The NBP raised its inflation forecast for 2021 from 2.5% to 3.2% by year-end, with the recent tax hike and administered price effects driving inflation in the near term while the recovery in oil and pent up consumption pressures once the economy reopens drive the headline figure in the medium term. Overall, the significant upward revisions in growth and inflation from today’s report combined with the continued dovish tone sends a message to markets that the NBP is expecting a strong economic recovery over the next few years while inflationary pressures won’t spook them. Nevertheless, market-implied policy rates indicate forward expectations for monetary tightening (chart). To assess if the bar for raising rates is as high as the NBP communicated today, investors should watch the central bank’s tone in the upcoming meetings.

Beyond the forecasts, the statement reiterated the NBP’s intention to keep the zloty at a relatively weak level but refrained from further FX intervention as EURPLN is trading well above levels the NBP intervened at previously in December.

As stated in our latest PLN outlook, December’s intervention by the central bank puts a psychological cap on EURPLN around the 4.45 level.

With EURPLN now trading well above 4.53, further currency intervention seems to be out of the window for now, although this should not have any implications for the zloty by itself per se. Looking forward,  PLN traders are likely to take further cues from a pickup in risk sentiment and Governor Glapinski’s speech on Friday.

Markets choose to focus on revised NBP forecasts and bring forward expectations for monetary tightening, ignoring the central bank’s unchanged dovish stance

Author: Ima Sammani, FX Market Analyst

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