FxWirePro: National Bank of Poland prolongs “status quo” approach on monetary policy - EMFX hedging proportions

NBP announces its benchmark rate decision today: it is more or less unanimously voted for the unchanged policy rate today; the benchmark interest rate in Poland was last recorded at 1.50 pct as widely anticipated.

It was rather difficult to envisage any reason as to why Polish central bank was to change any aspect of monetary policy today.

Rates have been on hold since H1’2015 and even the last MPC minutes did not portray any discernible uneasiness among MPC members about this. Most policymakers think that inflationary risks are minimal even though the economy is performing well.

In fact, in the last minutes, a view was also expressed, most probably by Eryk Lon, that a rate cut may have to be considered if the economy and consumer sentiment were to slow down from here. This was the mood when inflation had accelerated to 2.2% in September (target: 2.5%).

Since then, inflation has fallen. Polish inflation also moderated from 2.2% to 2.1%. The council is probably still vigilant because labor market and wage growth have been robust through 2017. The consensus view is to expect gradually higher inflation by next year. Still, we do not think that the central bank will be ready to signal a change towards 'tightening bias' anytime soon.

We EURPLN trending modestly higher over the coming quarters as the ECB implements tapering.

As per JPM’s GBI-EM Model Portfolio, we are an OW in RUB hedged against UW in ZAR and OW in PLN and CZK hedged against UW in RON. While the appointment of Jerome Powell as Fed Chair is more supportive for markets than some of the other names speculated would have been, plenty of risks remain for EMFX.

EMFX proportion has continued very high positioning per evidenced in J.P.Morgan's Local Markets Client Survey. Outflows have now commenced both from local bond funds, as well as equity funds and these could extend for some time. As such, we prefer to stay cautious.