Since the start of the year, the Złoty has fared better than other CEE currencies and most emerging market currencies. Since January, it has strengthened by approximately 1.5% against the euro. From April, the EUR/PLN exchange rate has moved in a sideways trend, close to the 4.30 level. We remain optimistic about the Złoty’s prospects and believe it can strengthen a bit more against the euro and the dollar this year.
Key points:
– The PLN is one of the best-performing currencies of emerging markets this year.
– Interest rate cuts in the coming months are not expected, but the NBP is turning slightly dovish.
– Economic growth in 2025 should accelerate.
– Wage growth is in double digits; inflation at the end of the year is expected to be close to 5%.
– The macroeconomic fundamentals are deteriorating, but this does not significantly alter the picture.
The effective exchange rate is growing particularly in real terms – in recent months it has reached the highest level since 2008, and has increased by about 20% over the last two years. Changes in global risk sentiment have not significantly affected the currency, and support for the Złoty has continued.
The currency’s performance reflects the largely favorable local and external environment. Monetary policy in Poland remains restrictive. The reference rate has been held at 5.75% for the last ten NBP meetings, and the next few months should not bring any cuts. Macroeconomic fundamentals remain good, economic growth is accelerating, and the inflation situation has normalized somewhat. At the same time, the EUR/USD exchange rate, which the Złoty often follows, has risen, supported by dovish expectations about the Federal Reserve, which is also beneficial for the Polish currency.
According to the latest data, the economy is performing better than early reports suggested – in the first and second quarters it grew by 0.8% and 1.5% q/q, respectively. The recovery is quite uneven, led by consumption. Economic growth of about 3% this year seems realistic again, and next year, when EU funds will likely be exploited more, it should accelerate and be more balanced.
Inflation is significantly lower than in 2022-2023, but has recently risen due to further phasing out of the government’s anti-inflation shield. Its main measure (4.3%) in August was again above the NBP’s target, which is 2.5% ± 1 pp. Core inflation has stabilized at an uncomfortably high level just below 4%, partly supported by increased but decelerating wage growth, which remains in double digits. It seems that inflation will rise to around 5% before the end of the year and in 2025, especially in its first half, will remain elevated.
We believe that interest rate cuts will return in 2025, most likely in March or July, when new economic projections will be published. Markets recently increased bets for monetary policy loosening in Poland and now price over 150 bp. cuts for next year. Although we agree that there will probably be some movements, we think the pace may be slower.
With the current government’s election promises adding to spending, the high deficit is also a result of Poland’s unique situation, forced to significantly increase military spending in response to increasing Russian aggression. Next year these expenses are expected to be 4.7% of GDP, more than twice the NATO guidelines – this will likely make Poland for the third year in a row spend the most on defense in relation to the size of the economy among the alliance countries. The true scale of defense spending and the macroeconomic impact of such a high deficit may cause some caution in the NBP.
Some of Poland’s macroeconomic fundamentals are deteriorating, however the overall picture has changed little and remains good. The balance of payments is moving from a significant surplus to a balanced level. Debt levels are rising, but they are lower than the EU average. We remain optimistic about the prospects for the Złoty and believe that it can strengthen a bit more against the euro this year.
Authors: Roman Ziruk, Michał Jóźwiak – Ebury analysts.
Source: https://ceo.com.pl/zloty-jedna-z-najsilniejszych-walut-cee-co-dalej-40780
