Monetary policy and financial asset prices in Poland

The aim of this study is to investigate the effects of monetary policy on financial asset prices in Poland. Following Gürkaynak et al. (2005) I test how many factors adequately explain the variability of short-term interest rates around MPC meetings, finding that there are two such factors. The first one has a structural interpretation as a “current interest rate change” factor and the second one as a “future interest rate changes” factor, with the latter related to MPC communication. Regression analysis shows that, controlling for foreign interest rates and global risk aversion, both MPC actions and communication matter for government bond yields, and that communication is more important for stock prices. Furthermore, the foreign exchange rate used to depreciate (appreciate) after MPC statements signalling tighter (easier) future monetary policy. However, the effect disappeared at the end of the sample. For most of the sample the exchange rate would appreciate (depreciate) or would not change in a statistically significant manner after an increase (a decrease) of the current interest rate. The results indicate that not only changes of the current interest rate but also MPC communication matters for financial asset prices in Poland. It has important implications for the conduct of monetary policy, especially in a low inflation and low interest rate environment.