At the meeting in October, the Monetary Policy Council lowered interest rates by 25 basis points, hence starting from Thursday the reference rate will stand at 5.75%. The zloty strengthened after the decision, as market valuations had assumed a larger movement.
The second consecutive interest rate cut in Poland brings definitely less emotion and volatility than the start of the cycle in September. It is also less controversial – the scale of the move is “standard”, in line with consensus expectations, it also happened in the face of a stronger than expected decline in inflation to single digits.
In the justification for the decision contained in the statement after the meeting, the Council mentioned that in its opinion “incoming data confirm the persistence of low demand and cost pressures in the economy, as well as the limitation of inflation pressure amidst a weakened business cycle in the Polish economy”. Apart from that, there are no significant changes in the statement compared to September – hence the burden of explaining the decision rests on Thursday’s press conference of President Glapinski.
An interesting side issue in the context of the MPC meeting are the announcements of the Ministry of Finance. Prior to the decision, there was information about a planned 4:30 pm speech by Deputy Finance Minister Artur Sobon about the decision of the Council. After the decision, however, this briefing was cancelled. We can only speculate, but it gives the impression as if the Ministry of Finance was frightened of a potential large cut and was ready to intervene with a verbal decision. When a “standard” move occurred, which resulted in a strengthening of the zloty, there was no such need, hence maybe that’s why the press conference was cancelled.
Zloty’s Reaction
Market valuations prior to the decision suggested that investors were expecting a deeper cut than the consensus, anticipating a movement of approximately 50 bp. Hence, naturally, the zloty strengthened against a smaller cut – in the first moment, the EUR/PLN exchange rate fell below the level of 4.60 (the lowest in a week) and is currently hovering around it.
Although the recent global market turmoil is not favourable for the zloty, it is possible that one of the significant domestic risks is beginning to lose its importance. The Council did not surprise the consensus and it seems that the zloty rate may be more significant for policymakers than suggested by President Glapinski after the September decision. This may increase the chances of slow readjustments in monetary policy. To confirm this, we await tomorrow’s press conference of the President of NBP. The central bank’s communication with the market is key, especially in such a critical period as now.
Author: Roman Ziruk – Senior Analyst at Ebury
