The European Central Bank has cut the base interest rate by 0.25 percentage point to 3.25 percent. This is the third cut at consecutive meetings, with previous ones occurring in June and September. Falling interest rates in Europe may strengthen the Polish zloty, but different trends could conflict in our market in the near future. The ECB’s rate cut increases pressure on the Monetary Policy Council (MPC) in Poland to also cut interest rates. However, rate reductions in Poland are most likely delayed until the second quarter of next year.
Today’s 25 basis point cut by the ECB was expected by the markets. September’s inflation in the Eurozone fell to 1.8 percent (from 2.2 percent in August) which is the lowest level since April 2021. Further possibilities for interest rate cuts are opened by both decreasing inflation in Europe and the weak performance of the economy, especially in Germany, which makes up about one-third of the total Eurozone economy.
The big question is, what will happen in the future. In a medium-term perspective, the ECB might decide to lower rates more swiftly and deeply than predicted so far. Short-term forecasts suggest another 25 basis point cut during the December meeting.
Concerns about a second year of recession in the Eurozone have contributed to the recent fall of the Euro’s value, below 1.09 USD. A weaker Euro is good news for exporters, as their goods become more competitive on international markets. Interest rate cuts weaken the currency, but the dynamic of the currency market is more complex. Actions by the Federal Reserve (Fed) will also be key towards the Euro-USD relationship. If the Fed cuts interest rates at a similar or faster pace than the ECB, the Euro could stabilize or even benefit from a weaker dollar.
However, long-term growth in Europe requires more than just interest rate reductions. Fiscal stimuli, tax incentives, investments in innovation and structural reforms in individual countries will be essential. This particularly applies to Germany, a key player in the Eurozone economy, which needs new growth impulses.
The interest rate cut in the Eurozone should support the Polish zloty, as interest rates in Poland are considerably higher. On the other hand, the zloty is viewed as an emerging market currency, which gains from a weaker US dollar. It seems that these two tendencies will compete in our currency market in the near future.
Lower interest rates in Europe and the USA increase pressure on Poland to cut interest rates. The most likely timeframe for these actions seems to be the second quarter of next year.
Paweł Majtkowski, eToro analyst in Poland
Source: https://managerplus.pl/ebc-obnizyl-stopy-procentowe-rosnie-presja-na-obnizki-stop-w-polsce-46422
