The dust still hasn’t settled after the last decision by the Monetary Policy Council (RPP), which brought an unexpected cut of 75 basis points. A month ago, artificially imposed conditions necessary for a cut were unfulfilled, but ultimately, the RPP decided to make a surprising move. The unexpected and large cut led to a massive sell-off of the Polish zloty and to date, we have not observed a normalization of this situation. Will the RPP this time decide on a safe and anticipated move, trying to win over foreign investors again? Or will it cut the interest rates further, which will lead to another wave of the zloty’s weakness?
The market consensus assumes a reduction in interest rates by 25 basis points. In this case, the legitimacy of a possible move is not important – the beginning of interest rate adjustment in Poland has become a fact and we can now try to predict what the next moves will look like and to what level the rates can be lowered. The cut of 25 basis points seems most likely – this is what the market prices in and the consensus of analysts shows. In addition, inflation for September fell quite heavily – 8.2% year-on-year and a drop of 0.4% month-on-month. Of course, the cuts in energy prices and maintaining low fuel prices helped in such a large decrease in inflation, but at the same time, the trend should remain unchanged this year – inflation may even head towards 6%. However, the key will be what the November inflation report shows us. If inflation is to fall within the target range by the end of 2025, further reductions will be possible. If the new report shows the target being pushed back to 2026, the prospects for cuts may be limited. In addition, it is worth mentioning the RPP’s desire to maintain negative real interest rates. If inflation is expected to be in the range of 6-7% next year, rates should be at 5% or below. On the other hand, cuts likely won’t be long-lasting, and the rate cut cycle should last until mid-next year at the latest. The base scenario however, assumes one or two cuts this year and then maintaining interest rates for a longer period of time with the expectation of further reductions in inflation to the target.
Of course, these predictions assume relative price stability, and as we know, quite a lot is happening on the global fuel market. At this moment, prices in Poland remain stable, but it cannot be ruled out that prices will rise again by the end of the year, as the price of oil is already much higher in November or December of last year.
Of course, if the RPP decides on a larger cut, the zloty’s loss can again be significant. During the cut in September, the zloty lost over 1% in one day, which was the strongest drop since March of last year when the war between Russia and Ukraine started. Maintaining interest rates is also a possible scenario, though few predict this. Such a decision is feasible looking at the weakness of the zloty, which is not desired by the Polish government, considering the desire to bring in foreign investors and simultaneously maintaining the attractiveness of Polish exports. Additionally, it must be remembered that a weak zloty delays the perspective of achieving the inflation target. The day before the RPP decision, which we should know from 2 pm to 4 pm (the last two decisions at 3:30 pm and 3:20 pm), USDPLN is quoted close to the levels observed in March, i.e., around PLN 4.42. Meanwhile, EURPLN is at PLN 4.62, clearly below the recent local peaks in early September when the pair approached PLN 4.70.
Author: Michał Stajniak, CFA, Deputy Director of XTB Analysis Department
