In September, the Polish zloty was fairly stable and strong prior to the lowering of interest rates. This stability was due to several factors. Recently, the Polish economy has seen a significant influx of foreign direct investment. The balance of trade with other countries is also improving. Furthermore, the relatively high interest rates attracted speculative investors. The Ministry of Finance also played a role, actively divesting currencies by selling them on the market, which also helped to stabilize the zloty exchange rate. The situation changed following the aggressive rate cut in September, which saw interest rates reduced by 75 basis points in a single move. In response to this decision, the zloty lost in 4 days what it gained in the previous 4 months.
An additional factor contributing to weakening of the Polish currency was the dovish rhetoric of the National Central Bank (NBP), which stands out compared to the approaches of central banks in the region and beyond.
“NBP is very dovish, which raises concerns about the return of high inflation and deregulation of the economy. That’s why the zloty lost so much,” Rafał Benecki, Chief Economist at ING Bank Śląski, told eNewsroom.pl. “However, last week the governor of the NBP said that there is limited room for lowering rates – then the Polish currency made up for a 7-8 groszy loss.”
What happens to the zloty by the end of the year depends on the realization of these NBP’s forecasts. Financial markets are awaiting these next decisions. If inflation continues to fall by the end of the year – possibly by as much as 3 percentage points – this would encourage further rate cuts, but the pace of these cuts will be very important for the zloty exchange rate. Other central banks are much more cautious, looking at long-term inflation, and both the FED and ECB even argue that after the last increase there will be no cuts at all anytime soon. However, the fundamentals of the Polish economy suggest that the decline of the zloty should not be significant or long-lasting. But many uncertainties remain, including the election results – Benecki analyzes.
