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Twists and turns of CEE central bank policy


Societe Generale

At this year’s Central & Eastern European Forum, Société Générale hosted the workshop titled ‘CEE central banks’ balance sheet expansion: a necessity or a risk?’. The speakers were Radoslaw Cholewinski (deputy head of fixed income at Pekao TFI), Martin Dolejs (portfolio manager, pension fund and insurance portfolios at Allianz), and Zoltan Aroksallasi (FX and rate strategist at Erste Bank), and I thank them for their insight, their knowledge, and their time. By Marek Drimal, EMEA Strategist, moderator of the workshop.

We pre-recorded the workshop in the middle of December, just ahead what everybody hoped would be a two-week holiday break, a quiet end to a turbulent 2020. However, non-standard monetary policy tools, which were the focus of our workshop, had not said their last word. The National Bank of Poland (NBP) launched largely unexpected FX intervention to weaken the value of the zloty going into year-end and stated its readiness to prevent excessive zloty gains in the near future, while several MPC members even moved to discuss the possibility of additional interest rate cuts. By nature of FX intervention to weaken a central bank’s own currency, these operations resulted in another boost to the NBP’s balance sheet, in line with the main theme of our workshop.

These twists and turns from the NBP have dominated CEE policy debates and market developments at the start of 2021. Even without making an explicit prediction on how the NBP’s FX intervention or interest rate policy is going to develop in the coming months, it is clear that the debate on standard and non-standard monetary tools in Poland and in the rest of CEE is as topical as ever.

The market has wondered whether the NBP will continue to weaken its currency and, taking into account the impact of a possible improvement in Poland’s competitiveness, whether some other regional central banks might be dragged into a currency war and weaken their currencies too. While the latter is unlikely, in our view, other central banks may face the dilemma of a currency appreciation that is too rapid for their liking in 2021. After all, fundamentals in the region are solid and the recovery in global trade is likely to further boost exports and current account surpluses. Some central banks, like the Czech National Bank, have signalled that a normalisation of interest rates may be debated as soon as in the second half of this year. CEE currencies may then see solid gains, but will this be acceptable for central banks, given the resulting deterioration in competitiveness?

And what about the duration of bond purchases and liquidity injections — tools, which have been employed by many central banks worldwide and in CEE? Policymakers will face a dilemma of whether to extend their support for government bond markets (either explicitly via outright purchases, or implicitly via liquidity injections) and investors will need to scrutinise the new normal supply-demand balance and the resulting yield compensation. Some central banks have already signalled that their presence in the bond market will likely be a long-lasting phenomenon.

Let’s hope we will be able to revisit these issues at the next Central & Eastern European Forum, in person and in Vienna, in a more normal but still different world than before.

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