The zloty tumbles as central bank shocks with a huge rate cut

The National Bank of Poland confirmed its reputation as the most dovish central bank in the CEE3 region by starting the interest rate cycle with inflation, both CPI and core, still in double digits. The base rate was lowered from 6.75 to 6.0 pct precisely one year after the rates topped out. Consequently the zloty faced the strongest sell-off in eleven months. The EUR/PLN rate, which for most of September traded in a tight range, skyrocketed towards 4,60, the level last seen in early may.

The decision was a shocker, as in previous press conferences, Governor Adam Glapinski had indicated that gradual monetary easing would be warranted if the annual inflation rate fell below ten percent. Despite CPI easing down in August to 10.1 pct year on year, central bankers opted not to delay the inevitable and pushed forward with a huge cut. On one hand, such a move was supported by the perspective of the inflation rate easing significantly below 10 pct year on year in September. On the other hand, the rush was justifiable after a recent string of disappointing economic releases. The sharp cut does not mean that the NBP will refrain from further loosening. Monetary authorities will remain data dependent.

Czech and Hungary's central banks will follow and start reducing their main policy rates in the fourth quarter, yet in a more cautious manner. In the case of Poland, the market was pricing in almost two percentage points of easing over the next 12 months. After an abrupt initial phase of disinflation, the improvement in price dynamics could stall and test these elevated expectations. The most up-to-date central bank's projection does not assume that inflation will not return to target before the end of 2025. The bottoming out of the economy and the recovery in consumption, supported by a strong fiscal stimulus in an election year, could further delay the decline in the annual CPI rate to 2.5%. The most recent developments, namely the upsurge in oil prices combined with the US dollar resurgence, also pose a significant risk to the inflation outlook.