Piotr Matys, EM FX Strategist at Rabobank, explains that they have argued that the reluctance to even consider a rate hike by Poland’s rate setters led by Governor Glapinski leaves the zloty more sensitive and vulnerable to the global backdrop. Key Quotes The latest comments from Poland’s most hawkish policy maker Kamil Zubelewicz validated our view. “The dovish rhetoric, in my opinion, is unnecessary and it doesn’t serve the Polish currency, main in pair zloty to euro” Mr Zubelewicz said in an interview with Bloomberg. The higher the core inflation, the more important the role of the Polish currency exchange rate and its volatility,” he told Bloomberg. “They impact many non-core components of inflation. That’s why the currency is so important for the stability of our monetary policy. We fully agree with Mr Zubelewicz. To recall, earlier this week we wrote that we find it increasingly difficult to justify the wait-and-see approach. The labour market continues to tighten, which applies upside pressure on wage growth at the time when private consumption is a major source of growth. The outlook for the Polish economy is relatively positive and maintaining GDP growth at or even above 4% y/y in the coming quarters is a realistic scenario.” It is also worth noting that last year the NBP used a stronger zloty as one of the main reasons not to raise rates. However, so far this year the zloty has actually depreciated. A weaker currency would not only have inflationary consequences due to higher costs of imports, but a far more volatile zloty could also undermine confidence amongst households and corporates. While comments from Mr Zubelewicz are positive for the zloty, as long as Governor Glapinski is not concerned about a weaker currency, it is difficult to expect that he will abandon his preference – shared by the majority of the MPC - to keep rates on hold throughout 2019 and perhaps until 2020. The wait-and-see bias will continue to weigh on the zloty.
First of all there needs to be transparency from central banks with regards to their plans for short, medium and long term interest rates - I agree this wait-and-see approach is not helpful. As the economy is already growing at a relatively high rate there is a chance that continued access to cheap finance will push the economy towards over heating. Also, when the inevitable interest rate rises start this will see more and more people who took out cheap finance struggling to cover future repayments. Even if central banks do not increase rates immediately, the threat of a rate rise can help to avoid overheating. If I did not know better I would suggest there might be elections coming up in Poland - why else would the authorities look to prolong the feel good factor?
