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Poland Monetary Policy May 2020

Poland: Central Bank slashes rates to fresh all-time low in May; reaffirms quantitative easing

On 28 May, the National Bank of Poland (NBP) slashed the reference rate from 0.50% to a new record low of 0.10%, in a further bid to mitigate the fallout from coronavirus. In addition, the Central Bank cut the Lombard rate to 0.50%, the rediscount rate to 0.11%, while keeping the deposit rate unchanged at 0.00%. At the same time, the Bank reaffirmed its commitment to support liquidity in the financial markets and contribute to the normal functioning of the banking system.

The Bank’s decision was prompted by the marked economic impact of the health crisis and lockdown, compounded by associated downside pressures on prices. In an effort to support lending at favorable rates, the Bank cut rates and stated it will discount credit granted to enterprises by banks aimed at refinancing loans. Moreover, the NBP reaffirmed its quantitative easing program, announcing it will keep purchasing government bonds in the secondary market to keep providing liquidity to the government bond market.

Looking ahead, the monetary policy stance will likely remain largely accommodative, in order to underpin the labor market and the economy and as inflation is set to move below the Central Bank’s 2.5% target. The spread of Covid-19 and associated containment measure took a heavy toll on economic activity in Q1 and sentiment indicators, coupled with April’s retail sales and industrial production data, point to an even sharper blow to the economy in Q2. Meanwhile, in terms of price pressures, shrinking domestic demand and lower commodity prices should lead to a significant decrease in inflation in the short- to medium-term.

The next monetary policy meeting is scheduled for 16 June.

Commenting on the meeting, Rafal Benecki, Poland chief economist at ING, stated:

“We think this rate cut has entered the area of increasing side effects of low rates, mainly threatening the stability of the financial sector. Also, the experiences of other countries show that near-zero rates likely result in credit availability deteriorating rather than improving. So, we don’t expect the central bank to test negative interest rates.”

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