Today, the Monetary Policy Council will make a decision regarding interest rates. Market consensus suggests that the cost of money will remain unchanged, maintaining the rate of 5.75% set in October last year.
Inflation Shield Removal
The main argument against the possibility of reducing the cost of money is the recently accelerating inflation, a result of the inflation shield’s removal in July. According to preliminary readings for August, consumer inflation is increasing year-on-year by 4.3%, marking the fifth consecutive higher reading. In such an environment, the dynamics of price growth are beginning to approach the cost of money again, binding the hands of the Monetary Policy Council in terms of possible easing. There are even voices predicting the possibility of an interest rate increase in today’s meeting, akin to the surprise last year when the rates were lowered by 75 basis points in September.
Budget for the Coming Year
In recent days, the budget for the coming year, which estimates a deficit of 289 billion PLN, or 5.5% in relation to planned economic growth, also contributed to the rising inflation. These heightened values may weaken the Polish złoty, thus generating further inflationary pressure due to the increasing cost of imported goods and services over time.
Geopolitics of the Region
If we were to consider external factors that may influence the behavior of the złoty, it is certainly worth mentioning geopolitics, which is currently strongly tied to the U.S. presidential elections scheduled for November 5th. In a simplified perspective, a win for Democratic representative Kamala Harris guarantees the continued arming of Ukraine and Israel, maintaining conflicts in these regions with the potential risk of further escalation. This in turn would also affect the investment risks in our region, which subsequently affects the złoty.
Donald Trump, on the other hand, has declared an immediate commencement of actions aimed at ending these conflicts. However, it should be noted that his potential victory does not necessarily mean a further strengthening of the złoty, as investors may also start pricing in his previous considerations of the U.S. leaving NATO. In addition to Turkey, the second-largest military power in NATO, eager to join BRICS, the future of the alliance may be in question. The potential collapse or weakening of NATO due to the withdrawal of the U.S. and Turkey would result in increased defense spending by the remaining member states. This would mean reduced investment in other sectors or the need for significantly increased borrowing. Both scenarios would hit local currencies, including the euro in attempts to maintain a weakened NATO.
The Federal Reserve
While many central banks have already commenced the first interest rate cuts, both the Monetary Policy Council and the U.S. Federal Reserve have not yet done so. The current downward trend on the dollar is largely a factor discounting the cycle of interest rate cuts overseas. These cuts, scheduled to begin with the FOMC meeting on September 18, assume that over the next year, the cost of money in the U.S. would be reduced by 200 basis points. Although this is a significant reduction, it leaves room for potential disappointment and revision of the easing scale.
This Friday, we will learn more important data in the context of what the Federal Reserve might do, namely the monthly report on the U.S. labor market. It is worth mentioning that a revision of data on employment change in non-agricultural sectors for the period from April 2023 to March 2024 occurred two weeks ago, with a massive year-on-year downward adjustment of 818,000. Combined with a growing unemployment rate and decreasing number of vacancies, these elements confirm that the U.S. labor market is experiencing a deflationary period.
If we add to this a significantly reduced (though not yet to the 2% target) inflation, we have a combination favoring the commencement of interest rate cuts. This was almost directly suggested by the chairman of the Federal Reserve, Jerome Powell, at the annual central bankers’ symposium in Jackson Hole.
In a situation where the Monetary Policy Council maintains the cost of money at the current level, and the Fed lowers it, the USD/PLN exchange rate may continue to fall, and in such an environment the złoty usually strengthens against most major currencies.
National Bank of Poland’s Gold Anchoring the PLN
It is worth noting that Poland continues to lead in the area of gold purchases by central banks. After the July purchases, our NBP directed gold reserves to 390 tonnes, accounting for nearly 15% of reserve assets. The statements of Adam Glapinski continue to stand firm, expressing a desire to increase the amount of precious metal to a level where it represents 20% of all reserve assets. We should remember that gold reserves are also taken into account by investment capital and rating agencies. Therefore, one may provocatively ask what the złoty would cost today if it weren’t for the accumulated gold reserves. So far, of these total 390 tons, only 105 are “in our hands” (stored in NBP vaults), and the rest is located in the Bank of England and the New York branch of the Federal Reserve.
Tomasz Gessner, Chief Analyst at Tavex.
Source: https://managerplus.pl/przewaza-argumenty-za-utrzymaniem-stop-procentowych-przez-rade-polityki-pienieznej-45309
