Cheaper loans at the price of a weakening zloty. The biggest drop in months
Last week’s decision of the Monetary Policy Council to reduce interest rates by 75 basis points led to an immediate weakening of the zloty. We pay more for euro, dollar, British and Swiss pounds.
On Tuesday before 10 a.m. the euro costs PLN 4.67, the dollar costs PLN 4.36, the Swiss franc – PLN 4.89 and the British pound – PLN 5.44.
The zloty is getting cheaper. We pay more for imported goods
“The rates of major currencies have increased by several percent since the beginning of September. The lion’s share of the significant depreciation of the Polish zloty is a result of the shocking decision of the Monetary Policy Council, which, contrary to previous suggestions of the President of the National Bank of Poland, started the cycle of reducing the reference rate with a sharp move, cutting the cost of money from 6.75 to 6.0,” explains Bartosz Sawicki, an analyst at cinkciarz.pl.
He adds that the recent sale of the zloty can already be compared to panic reactions to the biggest shocks of recent years: the outbreak of the pandemic or Russia’s attack on Ukraine. “Chances for improving the condition of the zloty should be sought primarily in global factors,” he says.
According to PKO BP analysts, a correction is possible on the EUR/PLN and USD/PLN pairs. “Monday’s continuation of PLN depreciation did not change much in the picture of EUR/PLN and USD/PLN, where medium-term upward trends continue. Technically, however, these pairs are already heavily overbought, and this should initiate a corrective scenario in the coming days towards 4.29 for USD/PLN and 4.61 for EUR/PLN, where there are currently short-term supports,” they wrote in their morning report.
Calculated risk or political action?
Lower interest rates will please borrowers because they will soon translate into lower monthly loan installments. Something for something: we will all lose because imported goods will become more expensive – starting with fuel. A weak zloty means higher costs for companies, which will certainly be passed on to customers.
It is puzzling that, knowing that the decision to reduce rates by as much as 75 basis points will weaken the zloty, the Monetary Policy Council decided to do so anyway. Citi Handlowy analysts suspect that the Council decided on this move, which would hit the economy, to help the government before the October elections.
“Recent changes in monetary policy increase the risk of PLN weakness, which the market quickly began to price in. In practice, countries with significantly higher inflation than those of their main trading partners may experience nominal depreciation (currencies – ed.),” we read in the commentary.
In this context, their attention is drawn to the fact that next year’s budget includes a significant profit payment from the National Bank of Poland: as much as PLN 6 billion.
Generally, the bigger the rate cut and the weaker the currency, the better the central bank’s annual performance. “Taking this into account, some investors may be afraid of further easing of monetary policy and further weakening of the zloty, at least at the end of the year,” the analysts continue.
