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The Polish Zloty Falls After National Bank of Poland’s Interest Rate Cut
The Polish zloty has fallen nearly 3 per cent against the euro since the National Bank of Poland’s shock decision to slash interest rates on Wednesday, highlighting the delicate balancing act that central bankers face in trying to shore up growth while inflation remains high.
Rate Cut Larger Than Expected
- Rate setters in Poland lowered borrowing costs by 0.75 percentage points to 6 per cent this week.
- This move was three times the size analysts had expected.
- Inflation is still running at 10.1 per cent.
Risk of Inflation and Weak Currency
- A weak currency risks fuelling inflation by raising the price of imports and stimulating demand for exports.
Reasons Behind the Decision
- Poland’s central bank governor Adam Glapiński said the decision was based on a “radically changed” economic outlook.
- Prospects of a recession in Germany are particularly worrisome for Polish exports.
- Inflation is expected to fall to slightly above 8.5 per cent in September.
Impact on Germany
- The German economy has been deteriorating rapidly, with industrial production falling 0.8 per cent in July.
- Core inflation in Germany has remained stubbornly above 5 per cent since last October.
Proactive Measures by Poland
- Poland has tried to be more proactive and get ahead of what they believe will be a broader growth slowdown.
European Central Bank’s Consideration
The move comes at a crucial time for the European Central Bank, which is considering whether or not to raise interest rates as it walks a tightrope of trying to tame rising prices while avoiding exacerbating an economic downturn.
Warning to Other Central Banks
- The fall in the zloty may serve as a warning to other central banks as they start to cut rates.
Undue Influence and Parliamentary Election
Some economists argued that Poland’s central bank had been unduly influenced by the goals of the ruling Law and Justice party, which faces a parliamentary election next month.
Impact on Czech Republic and Hungary
Currencies in nearby Czech Republic and Hungary were also pulled lower by Poland’s rate decision. However, the moves have been more muted as analysts say these countries are less likely to deliver monetary policy shocks.
- The Czech National Bank has kept interest rates at 7 per cent since June last year.
- Headline inflation eased to 8.8 per cent in July.
- The National Bank of Hungary has gradually lowered its rate from 18 per cent to 14 per cent since May.
- Inflation has fallen from a peak of more than 25 per cent earlier this year to 16.4 per cent in August.
Poland’s Foreign Exchange Reserves
- Poland has plenty of foreign exchange reserves should it decide to intervene to support the currency.