Poland’s Central Bank - How to Succeed in Troubled Times
Natalia Gurushina, Economist, Emerging Markets Fixed Income
March 17, 2020
Poland and Turkey frontload monetary policy easing. The U.S. Federal Reserve contemplates reinstating commercial paper funding facility.
I know that headlines with “strange” countries like Poland often do not have very high opening ratios, but I am willing to take a risk because of Poland’s stellar (and smart) policy record. Like many other emerging markets (EM) central banks, the National Bank of Poland kept its powder dry until the right moment. With the coronavirus threatening to push the continent into recession, Poland can now stimulate legitimately and in size—which it did by announcing its own asset purchase program (buying government bonds on a secondary market) and injecting PLN7.3B (about USD1.8B) in a 4-day repo operation (a rare event). The central bank also announced targeted longer-term refinancing type operations (TLTRO), albeit there are no details yet. Further, the central bank’s board recommended to cut reserve requirements for banks. And the icing on the cake?—Governor Adam Glapinski is expected to propose a rate cut! And it will be OK because lower oil prices will push inflation down. A fiscal package is also in place, but its announcement was delayed as one of the ministers got sick with the coronavirus.
Turkey’s central bank decided to follow the example of its EM and developed markets (DM) brethren and cut its policy rate by 100bps to 9.75% earlier today, extending the current easing cycle to 1425bps. The focus is mainly on providing cheap liquidity, which is understandable given the global situation. We would like to see more focus on structural issues to improve the quality of growth, but supporting financial markets is clearly a priority right now.
Relative growth still matters for asset prices, which is why the U.S. dollar soared by 170bps this morning (as of 10am EST, according to Bloomberg LP) following a very scary ZEW Survey1in the Eurozone (see chart below), which will probably get even scarier on the back of announced factory shutdowns in Germany and elsewhere. Reports that the U.S. Federal Reserve (Fed) will reinstate its commercial paper funding facility was also a big deal for the U.S. dollar, because this policy move can finally reassure the market that the Fed’s response is for real.
Chart at a Glance: Eurozone's Activity Gauge Collapses in March
Source: Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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