Polish central bank provides backstop for smaller banks

Markets in Poland responded positively both on Tuesday and Wednesday to the news that the National Bank of Poland was likely to take action to improve liquidity and reduce interest rates, a move that was confirmed yesterday evening.

The measures taken by the bank, in addition to the 0.5 percent cut in interest rates include performing repo transactions with individual banks. Repo is a way of providing liquidity to a bank by selling securities and buying them back soon afterwards at a slightly higher value.

This policy is to be combined with quantitative easing (QE) - buying government bonds on the open market. QE has been practised widely by both the European Central bank and the US Fed since the last financial crisis.

The proof in the pudding for central bank policies is always how the market reacts.

The Warsaw Stock Exchange’s main index the WIG was up around six percent yesterday, and only lost around two percent today in a day of highly volatile trading, while around the world markets fell markedly on both days.

Poland was not the only place where a raft of measures were unfolded to support the economy. Leaders in both the US and the UK assured massive packages of aid for businesses but the measures seemed not to affect the direction of play on the markets.

Adam Glapiński, the head of the National Bank of Poland (NBP) said “There is no way that any bank could get into difficulties with liquidity. We will do a repo transaction with them straight away.

He stated that “in the worst case scenario the NBP forecast growth of 1.6-1.7 percent for 2020.” There is no question of the economy going into recession this year. Once the virus is eradicated the economy will bounce back very strongly, with very high levels of consumption.

Comment:

Mr Glapiński’s comments come after the doomsday forecast of Morgan Stanley, whose analysts forecast that Poland’s economy would contract by 6 percent this year. Much depends upon how fast assistance can be given to businesses to prevent bankruptcies and what the “new normal” will look like after the threat of COVID-19 fades. Tourism and travel will not recover this summer.

If the value of EUR/PLN is anything to go by, then the NBP and government measures have not led to a major drop in confidence for the Polish economy. The stock market is still too volatile to come to any conclusions about having reached the bottom. The number of virus cases will continue to increase for the next few days, before hopefully beginning to fall, in light of the social distancing measures that have been taken in Poland. It may then be possible to gauge what the losses are and what we can expect.


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