Poland’s Central Bank - How to Succeed in Troubled Times
Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
Web Access Notice: VanEck is committed to ensuring accessibility of its website for investors and potential investors, including those with disabilities. If you have difficulty accessing any feature or functionality on the VanEck website, please feel free to call us at 800.826.2333 or email us at email@example.com for assistance.
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.
Van Eck Associates Corporation 666 Third Avenue New York, NY 10017800.826.2333