Tomorrow, the Monetary Policy Council (RPP) will decide on interest rates. The market is expecting a cut by 0.25 basis points, however, the Council, like a month ago, could surprise us. In this case, the Polish złoty’s value could once again plummet drastically. Until the elections, we may witness increased fluctuations in the złoty’s value.
Tomorrow awaits us with a decision from the RPP regarding interest rates. Following last week’s significant drop in inflation for September to 8.2%, the market is expecting that the RPP will cut the rates again, this time by 25 basis points. However, a month ago the case was similar, yet the interest rate cut ultimately amounted to 75 basis points. This decision led to the złoty weakening against the euro by over 10 grosze. Verbal interventions by government representatives were necessary to stabilize the rate. The złoty’s current rate against the euro is 4.61 zł, which is outside the government’s optimal exchange rate band of 4.40-4.60 zł per euro. This is therefore a unfavourable starting point for the złoty if the RPP wants to surprise us once again.
The market predicts that there may be a rate cut of 25 basis points tomorrow, which would take the level down to 5.75%. This is much more plausible after the significant drop in September’s inflation. However, we must remember that inflation still deviates considerably above the inflation target, which is 2.5% with a deviation of 1 percentage point. This would be a political decision, with the upcoming elections in mind, rather than a purely economic one. If the Council was willing to cut rates by 75 basis points with an inflation of 10.1%, it seems that it would find arguments for another cut now that inflation has dropped by 1.9 percentage points to 8.2%.
It’s worth noting, however, that the RPP’s decision in September caused a huge surprise in the market, leading to the złoty’s depreciation. It seems that the market is now more robust against such dramatic rate changes, regardless of the RPP’s decisions. Even if there were to be a rate cut greater than the anticipated 0.25 basis points, the market would certainly respond more calmly. But the starting point for the market’s reaction is different: today, the euro to the złoty rate is 4.61 zł, not 4.48 zł, as it was before the last rate-cut decision. A radical rate cut could therefore push the euro’s rate above 4.7 zł, a level that hasn’t been seen since the start of the year. In the coming days, we may observe additional volatility in the złoty’s value. This could continue until the elections, which will take place in 12 days.
Decisions by the RPP to reduce interest rates at this stage complicate the fight against inflation in the coming months and may result in higher inflation persisting longer. They may also improve economic growth outcomes in the coming quarters, aiding an economic recovery, but this should not be the aim of the RPP’s actions.
According to the latest Puls Inwestora Indywidualnego (Individual Investor Pulse) survey by eToro, 32% of Polish individual investors, most fear for the state of the Polish economy over the next three months, putting this factor at the top of potential external risks. The second most significant concern is the level of interest rates (15% of responses), followed by inflation, perceived as the biggest threat by 11% of investors.
Author: Paweł Majtkowski, eToro analyst in Poland
