According to the published minutes after the latest meetings of the European Central Bank and the National Bank of Poland, it is still too early to decide on changes to the monetary policy parameters.
ECB members discussed the limitation of stimulation at the last monetary policy meeting in June. They concluded that financing conditions are too fragile to allow for a significant reduction in the pace of purchases without the risk of a disorderly increase in yields, according to the minutes of the meeting.
As a result, slowing the pace of purchases for the next quarter was considered inappropriate. The ECB indicated that if the growth and inflation outlook improve, asset purchases should be reduced somewhat. At the same time, a warning was issued that even an increase in asset purchases may be warranted if inflation falls short of expectations.
The ECB left monetary policy unchanged at its June meeting, expecting net PEPP purchases in the coming quarter to continue at a much higher pace than in the early months of the year. The Bank also raised its GDP forecasts for 2021 and 2022 to 4.6 and 4.7 percent, respectively.
So if there were still a change in the ECB's inflation target, as market reports suggested this week, interest rates in Euroland could remain unchanged for years to come. Thus, the euro may be one of the weakest currencies in the coming months or quarters due to interest rate market expectations.
This message will not help the zloty
In Poland, the Monetary Policy Council rejected a proposal to raise interest rates by 15 basis points despite relatively high inflation. As can be seen from the published minutes, the majority of the Council members assessed that if the uncertainty as to the course of the pandemic and, consequently, the future economic situation persisted, and the increase in inflation above the target resulted from factors beyond the monetary policy control, it would be advisable to keep interest rates unchanged in the near future.
In the opinion of the MPC members, a tightening of monetary conditions in response to inflation above the inflation target, which results from negative supply shocks and regulatory factors, would not reduce price dynamics in 2021. Instead, it could hamper the process of economic activity recovery after its strong decline as a result of the pandemic, the nbp.pl website shows.
This may not be the best news for the zloty, as it limits expectations for interest rate hikes in Poland. This, in turn, may exert supply pressure on the Polish currency, which seemed to lose value systematically this week. The dollar was at its most expensive since April 2021 at PLN 3.84. The Polish currency also seemed to lose to the euro, the pound and the Swiss franc.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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