Polish zloty stable after MPC decision, USD climbs as investors abandon the euro once again

The Polish Monetary Policy Council in December kept the reference rate at 5.75%. The monetary authorities' decision was in line with market forecasts this time and did not arouse significant controversy. As a result, the zloty remained stable. The euro exchange rate is stuck below 4.35 PLN and is subject to limited fluctuations. At the same time, the dollar exchange rate returned above 4.0 PLN. The EUR/PLN may remain unimpressed by the USD's rebound due to the fact that it is driven by investors' growing appetite for sharp rate cuts in the euro area. The single currency is again pushing back. The current valuation already assumes that the ECB deposit rate in a year's time will be 135 bps lower than it is now, which is roughly a quarter percentage point cut more than the Federal Reserve.

In November, after two cuts totalling 100 bp, the cycle of rate cuts was suspended, justifying such a step and change of attitude by the uncertainty related to the consequences of the post-election political reshuffle. The question mark evoked by the Council at the time has not been answered in the past month. After all, none of the possible cabinets to be formed has so far received a vote of confidence. As a result, there could not be a definitive settlement on the continuation of sheltering mechanisms, such as a freeze on electricity rates or a reduced, zero-rate VAT on food. The formation of a government by the former opposition appears to be a formality and a matter of time, but we still do not know the details of the scale and timing of future changes in fiscal policy. These issues were again highlighted in the statement accompanying the decision.

The uncertainty emphasised by the monetary authorities may be an excuse to keep interest rates unchanged also at the beginning of next year. The Monetary Policy Council will want to wait for the March inflation projection and the budget amendment considering a potential increase in the tax-free amount or increases for employees in the public sector. However, it may turn out that even thereafter the room for cuts will be very modest. This will be influenced by the significant improvement in the economy and the fact that the annual inflation rate will be around 5% in the second half of 2024. It is possible that interest rates will remain at the current level of 5.75% throughout 2024.

The zloty: euro rates will be stabilised by the sudden change of the MPC

Over the past years, the NBP has been seen as one of the most dovish emerging market central banks. This has repeatedly become a burden for the zloty. The most notable and, at the same time, quite recent example was the sharp start of the cycle of 75bp cuts, which in September led to a shooting up of exchange rates and pushed the euro to the vicinity of 4.70 PLN. The subsequent 180-degree change in the monetary authorities' stance became one of the PLN's strengths. Monetary policy has contributed to a dynamic recovery, together with other elements of the market puzzle, which on the domestic side is complemented by the prospect of an end to the conflict between the Polish government and the EU and the unblocking of financing for the NRP, as well as forecasts of a strong rebound in GDP growth fuelled by consumption and an increase in budget expenditure. The zloty has been the strongest gainer of the relevant currencies this quarter.

The favourable impact of domestic monetary policy will continue next year as well. Especially if we take into account that investors are currently expecting cuts of a total scale of 100 bp, which seems to be an overly exorbitant valuation. The zloty will be viewed positively when the major central banks, led by the Fed and the ECB, start cutting interest rates and monetary easing in emerging economies gains momentum. The euro exchange rate may have narrowed room to fall after its recent sharp plunge. Improved perceptions of fundamentals and a lower political risk premium will, at the same time, work towards lower exchange rate volatility and increased resilience of the zloty to global market turbulence. Conotoxia's forecasts assume that in 2024, the EUR/PLN will fall to 4.25. USD and CHF should fall much more sharply against the zloty. We assume that the franc will equal the value of the euro, and the dollar will enter a downward trend for good. The USD/PLN, with the sustained rise of the EUR/USD rate above 1.10, will settle below 4.0 for good and will have a chance to fall to the vicinity of 3.65.