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Interest Rates May Hold, But Zloty’s Path to Strength Uncertain

INVESTINGInterest Rates May Hold, But Zloty's Path to Strength Uncertain

There is a potential for the interest rate to remain unchanged. Chairman of the Monetary Policy Council (RPP), Professor Glapiński, hinted strongly at this possibility yesterday. Despite expecting inflation in March, he emphasises that inflation might accelerate significantly in the second half of the year, which could justify maintaining the current interest rate. However, if the Federal Reserve does start to reduce the interest rates this year as planned, could this lead to a significantly stronger Polish złoty?

At this point, the market has significantly reduced its expectations regarding interest rates in Poland. It sees a chance for just one rate cut within the next 6 months. Conversely, it is impractical to expect the RPP to decide on cutting rates when forecasts show that inflation might strongly accelerate in the second half of the year. In the worst-case scenario related to administered prices, inflation could rise up to 8%! This would obviously require a return of the VAT on food to 5% and de-freezing of energy prices. Though a rebound of inflation to 8% seems extreme, it is still rooted in reality.

Given that, if the interest rates were to remain unchanged (with the main rate at 5.75%) and the US were to experience 3 cuts (from 5.5% to 4.75%), the way could potentially open for a further significant strengthening of the zloty. In such a case, we would be looking at the average levels of 2016-2021 – roughly the 3.70 zł per dollar mark! This is more than 30 groszy less than the current rate. Is this scenario realistic, though? It’s important to remember that excessive inflation is not beneficial for the economy and exchange rate. Therefore, if inflation in the US continues to fall and rises in Poland, even with a large differences in interest rates, the exchange rate might not necessarily reach a 3-year low. Second, high interest rates result in reduced economic competitiveness and limit economic growth. The Polish economy is strong, but had a weak 2023. On the other hand, the US continues to have relatively strong data, and the prospect of lower interest rates could potentially result in a significant economic improvement in the country. As can be seen, the prospects for a further strengthening of the zloty are not particularly clear. However, if economic activity in Poland bounces back and inflation stabilises at 4-6%, further strengthening of our currency is not out of the question.

Stabilisation is observed in the market. The dollar lost some ground in recent sessions and Wall Street stock market indices remain at historical peaks. China is starting to celebrate the Chinese New Year, which can result in reduced market volatility, although there is still uncertainty about the situation in the Middle East.

At 09:15, the exchange rates were 4.0102 zł for the dollar, 4.3205 zł for the euro, 5.0628 zł for the pound, and 4.5824 zł for the franc.

Author: Michał Stajniak, deputy director of the XTB Analysis Department

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