Poland Signals Caution in Future Rate Cuts After Zloty Slide

Two top Polish policymakers signaled the central bank will move more cautiously in cutting interest rates after an unexpectedly sharp reduction earlier this month pummeled the zloty. The currency rallied.

(Bloomberg) — Two top Polish policymakers signaled the central bank will move more cautiously in cutting interest rates after an unexpectedly sharp reduction earlier this month pummeled the zloty. The currency rallied.

Governor Adam Glapinski described the scope for more cuts as having “narrowed considerably” in comments to the PAP newswire on Wednesday. His colleague on the 10-person Monetary Policy Council, Henryk Wnorowski, told Bloomberg News that the central bank has learned a lesson from the currency’s deprecation, which he described as excessive. 

The remarks are helping reassure investors that policymakers won’t continue with outsized rate cuts. A number of economists called September’s 75 basis-point reduction a politically motived move aimed at helping the government overcome the cost-of-living crisis by reducing Poles’ mortgage payments before next month’s elections.

“The lesson from the exchange-rate reaction may suggest that there is now a greater need for more gradualism, rather than decisive action in monetary policy,” Wnorowski said in an interview. “It’s obvious to me that this should be looked at and taken into account in the future.”

Tamer-than-expected price pressures justified the easing and if inflation continues to decline, so will official borrowing costs, Glapinski said. However, the governor said scope to cut rates further was limited.

“After this adjustment, the room for further interest rate cuts has narrowed considerably, although it will continue to be there with incoming data,” the governor said in response to questions from PAP.

He didn’t link the reduced scope for easing with the turmoil on markets following the cut two weeks ago, which blindsided investors and sent the zloty weakening by as much as 4% against the euro. 


Natural Fluctuations

In response to the policymakers’ comments, the zloty jumped by as much as 1.1% against the euro on Wednesday, the best performance among emerging-market currencies. Warsaw’s WIG20 stock index advanced 2.3%, the biggest gain in the world among primary indexes tracked by Bloomberg. Poland’s 10-year bond yield declined.

Meanwhile, forward rate agreements showed that traders are paring bets on the scale of Polish rate cuts to about 135 basis points over the next nine months from as much as 200 basis points earlier in September.

The attempts to clarify the rate outlook comes after Pawel Borys, an aide to the prime minister, told Bloomberg last week that the government is ready to shore up the currency after its steepest drop since Russia’s invasion of Ukraine. He also admonished the central bank to weigh the impact on the zloty in future decisions. 

Read more: Poland Moves to Halt Zloty Rout After Rate Cut Triggered Selloff

Asked about the zloty’s reaction to the latest cut, Glapinski reiterated that Poland maintains a floating currency regime, where exchange-rate fluctuations are natural, according to PAP. 

“A rate cut in October cannot be categorically excluded based on remarks from Governor Glapinski, who provided arguments in favor of lowering interest rates further, although he did admit that the room has narrowed,” said Piotr Matys, a currency strategist at In Touch Capital Markets. Selling pressure on the zloty could resurface ahead of the next rate meeting, he said.

Analysts at Citigroup Inc. said they expect Poland to cut rates by 25 basis points in both October and November, adding that they’re more pessimistic about the pace of disinflation in 2024 than Glapinski. 

The governor dismissed the idea that the central bank has effectively changed its inflation target and said the monetary authority is “determined to bring inflation down to the target in the medium term.” Inflation stood at 10.1% in August. The central bank’s target is 2.5% over the medium term.

“Lower demand pressure and lower inflation in the coming months coupled with the deterioration of the growth prospects of the German economy, clearly indicate that inflation will also run below the July projection in the medium term,” he told PAP.

–With assistance from Piotr Skolimowski.

(Updates with market reaction from the first paragraph, analyst comments)

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