Afternoon analysis 04.09.2014

The euro reached new lows after the ECB's unexpected move. The pound extended loses as referendum looms. The zloty rose due to increase of risk-taking in the markets.

Unexpectedly, the European Central Bank cut interest to the lowest level ever recorded. The main refinancing rate was decreased to 0.05 percent and the deposit rate dropped to minus 0.2 percent. Moreover, the ECB announced an asset-backed securities purchase program starting in October 2014.

The ECB will buy “simple and transparent” asset-backed securities under two programs – first ABS purchase programme (ABSPP) aimed at ABSs consisting of claims against the non-financial sector and second covered bond purchase programme (CBPP3) aimed on ABSs consisting of claims against monetary financial institutions. There was no information on the scale of the purchases.

The euro extended loses against the dollar after the decision was announced. The shared currency dropped to the lowest level since mid-July 2013. The EUR/USD touched to 1.29946.

Hope for the ECB using additional measures was one of the main engines of financial markets in the last few weeks. An appetite for quantitative easing in the eurozone was fueled by Mario Draghi's speech at the seminar in Jackson Hole, when he highlighted the falling inflation expectations and promised to implement all possible measures needed to safeguard price stability. In addition, the ECB president urged the European governments to put more effort into growth-restoring policies instead of the austerity approach.

The ECB action wasn't expected mainly due to the German opposition against the bond-buying program. The finance minister Wolfgang Schaeuble reiterated that the monetary policy has exhausted its influence on the economy. A similar approach was presented by the Bundesbank President Jens Weidmann, who has expressed a negative view on a bond-buying program since the beginning of the discussion on QE in the eurozone.

The ECB President Draghi said that the decision wasn't unanimous, nonetheless, there was a confident majority and the Governing Council was unanimous in intent. The ECB President said the quantitative easing was discussed.

Scotland more important than BoE

The Bank of England left interest rates unchanged, as expected. The main interest rate stood at 0.5 percent – the lowest level in history. The pound extended losses after the BoE's decision against the dollar and the euro. But later the sterling recouped losses against the common currency due to the ECB’s decision.

Currently, the source of the weakness of the pound is the issue of Scotland’s independence. The recent survey showed growing support for Scotland's secession from Britain – the advantage of people opposed to independence has narrowed to just six percentage points from 14 pp. in the previous survey. After the survey was shown three days ago, the pound dropped to the lowest level since the middle of February against the dollar and fell from a one-month high against the euro.

The possibility of an independent Scotland poses many difficulties. There are technical aspects concerning fiscal and monetary policies to be considered. In addition, there is the looming question about maintaining the economic policy in the case of a crisis.

The BoE was considered the first key central bank to raise interest rates after the financial crisis. However, the case for leaving the accommodative monetary policy was deferred after the release of the data pointing to weak inflation growth. In addition, the BoE President, Mark Carney, said the interest rates increase will be determined based on the labor market developments. The BoE's shift and the issue in Scotland has battered the pound.

The MPC will cut the rates

The Polish Monetary Policy Council is going to cut interest rates in October. The president of the National Central Bank of Poland, Marek Belka, said that the MPC will lower the cost of credit if the next data show slowing economic and price growth. The NBP President said there will be more than one cut, but he refrained from giving the expected total amount of cuts. The extent of the cuts will be determined by the incoming data.

The zloty rose against the euro to 4.186 and dropped against the dollar to 3.217. The U.S. currency is at the highest level since September 2013 against the zloty. The frank dropped to 3.471 and the pound rose to 5.285.

In the context of the ECB's move the Polish MPC may be willing to act more strongly to prevent the zloty appreciation and implement steeper cuts. From the perspective of the zloty the most relevant information is the Ukrainian President’s, Petro Poroshenko’s, statement from Friday? (Has this statement been made?regarding the possible cease-fire, that might further lower geopolitical risk in the region. Marek Belka pointed to the Ukrainian crisis as one of the reasons for inaction of the MPC in September.