ECB cuts interest rates. Pressure to cut rates in Poland is growing

The European Central Bank cut its key interest rate by 0,25 percentage points to 3,25 percent. This is the third rate cut at consecutive meetings – the previous ones took place in June and September. Falling interest rates in Europe may strengthen the złoty, although in our market different tendencies may clash in the near future. The ECB rate cut increases the pressure on interest rate cuts by the Monetary Policy Council (MPC). We will most likely wait for cuts in Poland until the second quarter of next year.

Another rate cut in December?

Today's 25 basis point ECB cut was expected by markets. Eurozone inflation fell to 1,8% in September (from 2,2% in August), the lowest level since April 2021. The possibility of further interest rate cuts is opened up by both falling inflation in Europe and the weak performance of the economy (especially in Germany), which accounts for about one-third of the entire eurozone economy.

The most emotional question, however, is what will happen in the future. In the medium term, the ECB may decide to cut rates faster and deeper than previously anticipated. Short-term forecasts assume another 25 basis point cut at its December meeting.

Concerns about the second year recession in the euro zone contributed to the decline in the value of the European currency in recent days below 1,09 US dollars. A weaker euro is good news for exporters as their goods become more competitive in global markets. Interest rate cuts weaken the currency, but the dynamics of the currency market are more complex. The actions of the Federal Reserve (Fed) will also be key for the euro-dollar relationship. If the Fed cuts interest rates at a similar or faster pace than the ECB, the euro could stabilize or even benefit from a weakening dollar.

Pressure to cut interest rates in Poland

Long-term growth in Europe, however, requires more than just interest rate cuts. Fiscal stimulus, tax breaks, investment in innovation and structural reforms in individual countries will be key. This is particularly true for Germany, which is a key part of the eurozone economy and needs new growth impulses.

The reduction in interest rates in the eurozone should support the złoty, as interest rates in Poland are much higher. On the other hand, the złoty is seen as an emerging market currency that benefits from the weakening US dollar. It seems that these two trends will compete in our currency market in the near future.

Falling interest rates in Europe and the US are increasing the pressure to cut interest rates in Poland. The most likely date for such actions in Poland seems to be the second quarter of next year.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.