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(Bloomberg) -- Poland’s most-dovish central banker urged his colleagues to be ready to deploy more monetary easing in the face of a record outbreak of Covid-19.
The European Union’s biggest eastern economy has already slashed interest rates to near zero as it grapples with its first recession since the collapse of communism. But after weathering the initial coronavirus wave better than its western neighbors, daily infections have spiked beyond 8,000 from as little as 1,000 less than a month ago, prompting a raft of new restrictions from the government.
“In the current circumstances, one should be particularly watchful and stay ready to extend the process of monetary-policy easing,” Eryk Lon, who sits on the bank’s 10-member rate-setting panel, said in an interview.
While his well-known dovish stance doesn’t represent the views of a majority on the Monetary Policy Council, there are signs his fears over the economy are spreading. After keeping its benchmark rate at 0.1% for a fifth month last week, the bank warned that the recovery may be slower than previously expected.
Lon frets that the pandemic’s growing threat could trigger a “significant deterioration” in the economic climate, including a “serious worsening” of consumer confidence. He advises considering standard as well as unconventional tools to loosen monetary policy, possibly featuring credit instruments and asset purchases.
Quantitative easing is already part of Poland’s economic-rescue package, which includes 64 billion-zloty ($16 billion) of fiscal support from the government. Central bank Governor Adam Glapinski has repeatedly said he’ll do “whatever it takes” to help the economy, though a minority on the MPC is wary of rates staying low for too long.
Even if the current virus concerns abate, another crash in American equity prices could also provide grounds to discuss further interest-rate cuts, according to Lon, without specifying whether borrowing costs could be reduced below zero.
“Experience shows that a significant and long-lasting slump in the U.S. stock market worsens the mood of participants in economic life around the world,” he said. “As a consequence, this leads to a weakening of economic activity in many different countries.”
The national currency is also a factor. The central bank has long sought to steer it lower against the euro, reiterating last week that the pace of economic growth may be limited by “the lack of a visible zloty exchange-rate adjustment to the global pandemic-driven shock, as well as to the local monetary response.”
Emerging-market currencies including Poland’s could weaken if global growth worries return and looser monetary policy could help further, according to Lon, who called the the current exchange rate “favorable for Polish exporters.”
“This could additionally constitute an export-oriented impulse,” he said.
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