The market is scaling back its expectations for interest rate cuts in Poland this year. The cuts will come, but later than expected, and this also applies to the major central banks.
It was not expected that the Monetary Policy Council (RPP) would decide to cut rates in February at a time when forecasts suggest inflation could accelerate heavily in the second half of the year. In the worst-case scenario involving administered prices, inflation could rise to as much as 8%. This would result from a return to a VAT rate on food of 5% and the thawing of energy prices. Although a rebound in inflation to 8% seems extreme, it is not detached from reality.
Two interest rate cuts were expected in the second half of the year, but investors are now reassessing their expectations.
“Interest rate cuts are priced in globally faster than here, even though they began here earlier, not because we had an exceptionally favourable inflation situation,” says Dr Przemysław Kwiecień, Chief Economist at XTB, in a conversation with MarketNews24. “In Poland, the space for lowering interest rates is the least obvious. In Poland, we have not had such issues for over twenty years, since we dealt with ‘wild’ inflation.”
The situation is different for the Fed and the ECB. In economies accustomed to zero or even negative interest rates, rates at 4% are highly noticeable and could cause a lot of disruption in the economy. And it is there that the decisions about when to cut rates are made, with changes in oil prices, for example, being important.
If interest rates in Poland stay unchanged (the main rate remains at 5.75%), and we were to experience 3 interest rate cuts in the US (from the current level of 5.5% to 4.75%), the path to a further significant strengthening of the zloty could potentially open up.
In such a case, the average levels from 2016-2021, namely around 3.70 PLN per dollar, would be within reach! This is over 30 gr less than currently.
If inflation in the US continues to drop and rises in Poland, even with a large interest-rate gap, the exchange rate may not necessarily reach 3-year lows. High interest rates reduce the competitiveness of the economy and curb economic growth itself, and although the Polish economy seems strong, it is still reeling from a very weak 2023.
We continue to have relatively strong data from the US, and the prospect of lower interest rates after the Fed’s decisions could open up the prospect of a noticeable economic revival in that country.
“The situation for the Fed, however, remains unusual, because we have strong labour market data, and the already increased rates should have reduced consumer demand and caused at least some increase in unemployment through reduced production,” explains the XTB expert. “However, demand remains strong, macroeconomic data is good, and the results of American companies confirm that the economy is managing well, the situation has not deteriorated, the opposite has happened.”
As you can see, the prospect for further strengthening of the zloty is not so clear. However, if economic activity in Poland rebounds and inflation stabilises in the 4-6% range, further strengthening of our currency is not ruled out.
Could the signal for lowering interest rates come from the Fed, next the ECB, and the RPP should wait for the decisions of the major central banks?
“The Fed has a big impact on what happens globally in the interest rate market, because the role of the American economy is very big, and the role of the dollar as reserve money is still undisputed,” comments P.Kwiecień from XTB. “Each central bank has its inflation target, which it should primarily be guided by, but to some extent the Fed sets the conditions of the game, sets the direction.”
In March, we will learn about the NBP’s new inflation projections. The RPP needs new data to potentially revise its plans for changing interest rates this year. At this moment, the market sees chances for only one interest rate cut in the six-month outlook.
Average annual inflation in 2024 will fall to 3.5%, are there also such forecasts? This scenario belongs to the highly optimistic ones, the expert assesses.
