News & Analysis

While most renewed lockdown measures globally have led to smaller economic losses and less of a shock in financial markets than the initial outbreak in Q1, the Polish zloty still plunged to record-lows against the euro after the government outlined renewed containment measures at the end of October. The nation reported record daily rises in both new cases and deaths beginning November. According to Poland’s Prime Minister Mateusz Morawiecki, the surge in case count is linked to the recent mass protests that took place after a constitutional tribunal announced a near-total ban on abortion in the nation that already had some of the most restrictive laws in Europe.

For now, Poland’s government has delayed the implementation of the court ruling, leaving the zloty at the mercy of the nation’s political situation.


EURPLN falls from record highs as zloty pares back losses

EURPLN fell from record highs earlier this month, as the zloty pared back losses. However, the currency saw marginal declines this week along with the Hungarian forint after Hungary and Poland vetoed the European Union budget and virus recovery fund due to debate over included rule-of-law conditions. The move will likely cause another round of fraught negotiations between the bloc’s leaders as the EU requires unanimity to authorise the European Commission to issue jointly backed debt. Poland is among the main beneficiaries from the EU budget and recovery fund, and any further delays will likely weigh on the zloty, although the decline will be seen in USDPLN more so than in EURPLN as the news is digested by markets as a euro-negative.



In terms of monetary policy, the National Bank of Poland repeatedly signalled its position on negative rates, saying there is no room to cut further. Policy makers have also signalled that rates will stay low for the time being, with NBP Governor Adam Glapinski saying that policy makers are aware that near-zero interest rates will hit bank earnings but risks to economic growth are more important. A couple days later, MPC member Jerzy Zyzynski stated that monetary policy should remain stable for a longer time, with no change to the current parameters, and added it would be hard for him to imagine below-zero rates in Poland. Regarding the central bank’s QE programme, MPC member Grażyna Ancyparowicz, stated that Poland should expand QE to tackle the virus fallout. Markets are expecting a potential increase in the size and/or frequency of purchases by year-end or early 2021, according to Bloomberg. Given the latest lockdown measures, the zloty’s immediate reaction at those measures, and the NBP’s downwardly revised 2021 GDP projections at its latest meeting following the measures, this is a realistic scenario. The central bank upwardly revised its CPI projections in 2021, but this should not prevent further easing if needed.


NBP Growth and inflation path changes from July to November

The risks of current lockdown measures being in place for a long time is high, making further easing only a matter of time for the NBP. Further asset purchases remain more likely than a further rate cut into negative territory given the central bank’s latest commentary, while the NBP also has room to strengthen the instruments facilitating credit creation. Since April, the NBP has made bill discount credit available to banks as a way to allow banks to refinance loans granted to non-financial enterprises. Earlier monetary policy statements highlighted the central bank’s preference for a weaker currency, lowering the threshold for the NBP to provide further stimulus.



October’s year-on-year inflation figures eased to 3.1% after the September figures showed the first YoY acceleration since July. Monthly data showed a 0.1% increase, a deceleration from September’s 0.2%. Given the renewed lockdown measures, inflation is likely to remain on the back foot in the near term, but Poland’s economy has the potential to recover more strongly than its neighbouring countries over the years to come.

The country’s healthy fiscal position and loose monetary policy can help the economy get back on track considering Poland’s economy rebounded quickly from its slump in April as well.

Retail sales and industrial production returned towards pre-virus levels at the end of Q3, boding well for the expected recovery in 2021-2022. Additionally, the global and domestic recovery should also prompt increased emerging market bond flows and gradually draw back investors’ interest in EM debt. However, political risks do remain high in Poland, with the EU budget and recovery fund being up in the air and the abortion ban prompting the biggest protests since the fall of communism.

Our EURPLN forecasts continue to envisage a general EM rally in 2021H1, with EURPLN trading back to 4.3 by the end of 2021.



Author: Ima Sammani, FX Market Analyst



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