The zloty gains as the NBP opts for a cautious cut

The National Bank of Poland continues the monetary easing that began in September with a huge 75bp cut. Today, the main policy rate was reduced from 6.0 to 5.75 pct. The zloty gained after the decision. The EUR/PLN rate started testing a key 4.60 area, in which the PLN gains have recently faded.

Last month's mammoth cut came as a gigantic surprise and pushed the Polish zloty sharply below in red. Today's more cautious decision is in line with median consensus. Nonetheless, the rate-setting Monetary Policy Council kept the markets guessing as numerous market participants expected no change or a bolder cut.

Inflation in Poland took another nosedive in September, paving the way for a second consecutive cut. Key measures of inflation are now back in single digits. The annual CPI rate fell from 10.1 to 8.2 percent. The month-on-month decline in consumer prices was 0.4 pct, the largest since 2016. The core rate most likely fell below 9 pct year-on-year.

Policymakers opted for a more cautious approach to support the struggling PLN. In September, the EUR/PLN rate climbed close to the 4.70 handle, and the zloty experienced the greatest monthly loss against the US dollar since 2016. After today's decision zloty gained; the daily EUR/PLN's fall exceeded 0.5 pct. The zloty should regain traction and recover in the remainder of the year. The next hurdle will be the parliamentary elections on 15 October. Conotoxia's forecasts assume the EUR/PLN pair will trade close to 4.50 at the end of the year.

Our baseline scenario is another rate cut of 25 bp in November, followed by a pause in December. Next year, the disinflation might stall, especially if consumption boosted by monetary and fiscal stimulus finally starts to pick up. The annual CPI rate will likely remain close to 5 pct in H2 2024. Therefore, the scope for rate cuts is limited. The main policy rate is not expected to be lowered below 4.5 pct next year.