The volatility in the foreign exchange market during yesterday’s ECB decision and the subsequent press conference was limited. The euro gained slightly, but the volatility in the main currency pair remained constrained. This was because the bank’s decision was widely anticipated and already priced in by the market. Apart from slight changes in forecasts, nothing significant was provided that could alter the perception of future actions by the European institution. More changes occurred in zloty pairs. The PLN strengthened against major currencies because the Monetary Policy Council (RPP) rejected the possibility of interest rate cuts this year.
One of the hawkish surprises was the revision of inflation forecasts for the coming years. ECB economists raised their estimates for 2025 by 0.2 percentage points for the overall index and by 0.1 percentage points for the core index. To some extent, this contradicts yesterday’s decision to cut borrowing costs, but ECB policymakers may now want to maintain the level of interest rates at a still-high level just a bit longer. Currently, the market prices the chances of a rate cut in July at about 40%. The probability of a reduction at the December meeting is higher at 65%.
At the press conference, Lagarde acknowledged that confidence in achieving the medium-term inflation target has increased. She argued the June decision with significant progress in the disinflation process. She also indicated that further easing is possible, but no specific dates were given. The ECB clearly does not want to commit to a predetermined path. It wants to follow the data and react accordingly.
Both Wednesday’s RPP decision and Thursday’s press conference strengthened the zloty. The Council’s restrictive stance was confirmed. A rate cut this year has been ruled out for now. NBP policymakers, led by Adam Glapiński, want to stabilize inflation within the horizon of monetary policy influence – hence their current actions. It was signaled quite clearly that potential cuts could appear around mid-year, but before that happens, the RPP must have strong arguments. The Council’s “hawkishness” was reinforced by Glapiński’s assessment that potential rate hikes are realistic if the latest projections indicate an increase in CPI indices next year. However, such a scenario is currently unlikely. The RPP currently sees core inflation at around 4% by the end of this year and the overall CPI index at 5.2% y/y. According to the Council, the main threat of rising inflation in the future is wage growth and significant uncertainty regarding energy prices in the second half of the year. Additionally, the impact of the return to a higher VAT rate on food in the future may still affect the overall price growth dynamics.
At this moment, the divergence in monetary policies of the ECB (cuts) and the RPP (stabilization at a high level) is likely to have a positive impact on the zloty in the medium term. If Fed rate cuts (in September) are added to this, the strength of the zloty could be further supported.
Łukasz Zembik, Oanda TMS Brokers
