The Polish zloty is trading within its recent ranges this morning against USD and EUR, after comments from the National Bank of Poland’s Monetary Policy Member Eugeniusz Gatnar failed to stir volatility.
Gatnar told the Rzeczpospolita newspaper that Poland’s benchmark interest rate is too low at its current level as it hinders the start of repo operations at below the reference rate. It is not the first time Gatnar made such comments: in July, he stated in an interview that recent rate cuts have gone too far, and that the MPC should “consider gradual start of monetary policy normalisation next year”. Other policy makers have commented on the rate cuts repeatedly as well:
- August 7, Jerzy Kropiwnicki: “If the interest rate is increased quite mildly, I wouldn’t be particularly concerned about the negative effects on the economy”.
- July 31, Jerzy Kropiwnicki: “We would need to consider raising rates next year; if not at the beginning of 2021 for sure in the middle. Rates should be gradually increased to about 1.5%.”
- July 9, Lukasz Hardt: “One way to normalise MPC policy would be an interest rate hike and a subsequent pullout from quantitative easing.”
The comments from some of the Monetary Policy Council hawks come after the Bank shaved 140 bps off its benchmark rate since the start of the pandemic, leaving many with concerns over the disinflationary risks the rate cuts pose in the medium term. Despite the recent comments, recent official releases from the bank suggest that accommodative policy will not be changing any time soon.
The two latest monetary policy statements said:
The pace of economic recovery can also be limited by the lack of a clear adjustment of the zloty exchange rate to the global shock caused by the pandemic and the loosening of monetary policy.
The statement highlighted the benefits of a weaker zloty, which has arguably been the main driver of the earlier rate cuts. The measures turned out to be effective: since the recent cutting cycle, the zloty has remained relatively stable against the euro despite the Bank announcing significant asset purchases. The bank may eye further monetary easing, especially if a second wave of virus cases hits the nation.
One notable risk scenario for the zloty remains if general US dollar strength changes market conditions and investors become less eager to hold higher yielding debt, such as POLGBs, which would weigh on the zloty.
Chart: EURPLN remains relatively stable since cutting cycle
Author: Ima Sammani, Junior FX Market Analyst