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Polish Złoty Poised for a Minor Devaluation with the Upcoming Rate Announcement

Polish Złoty Poised for a Minor Devaluation with the Upcoming Rate Announcement

2014-11-05 19:53:00
Michael Romero,
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Polish Złoty Poised for a Minor Devaluation with the Upcoming Rate Announcement

Talking Points:

  • Poland experiences negative inflation for the first time in 32 years.
  • Weakening Consumer Price Index.
  • Russian Import Ban contributes to falling Polish currency.

Poland’s consumer-price index, a common indicator for inflation or deflation, has plunged significantly since beginning its decent in June of this year, bolstering a 32 year record of an increasing index. Despite the hopeful expectation of a short-lived period of falling prices, the National Bank of Poland, in line with its continuous inflation target of 2.5% with a permissible fluctuation band of +/- 1 percentage point, slashed interest rates by 50 basis points to 2% to foster spending, in its October 8th meeting, which led to the USD/PLN to find resistance at 3.35. Also in concordance with their monetary policy strategy the National Bank reduced the Lombard rate from 3.50% to 3.00%. Despite these implementations the National Bank pointed to the bleak economic outlook of the Eurozone and further deterioration as shown through various business indicators. Low inflation, stagnant growth, and the on-going Ukrainian conflict will signal a further slashing of interest rates in the upcoming rate announcement, scheduled for November 5th. Romania took the first initial step today as the Central Bank pushed rates to 2.75% from their original 3.00% last month.

Following the upcoming rate announcement, investors can expect a further weakening of the Złoty vis a vis other currencies. Normally such low inflation in Poland would signify an increase in the exchange rate, as investors would reap the returns of such competitive Polish goods, however theZłoty continues to plummet as the trade war with Russia ensues. Furthermore, as interest rates dive to never before seen depths, investors seek return elsewhere. Investors can expect a further slashing of interest rates to an all-time low of 1.75% according to 27 of the 37 leading economists surveyed by Bloomberg and as a result will see a further devaluation following the upcoming rate announcement.

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