What next with interest rates in Poland? How might the euro and dollar exchange rates react?

Yesterday, the Monetary Policy Council, in line with the market consensus, left interest rates unchanged. The reference rate is therefore still 5,75%, although we are facing a further strong decline in inflation in the first quarter.

As stated in the communication accompanying the decision:

"... In the Council's assessment, the incoming data indicate that despite the observed economic recovery, demand and cost pressure in the Polish economy remain low, which, in the conditions of weakened economic conditions and falling inflationary pressure abroad, will contribute to a gradual decline in domestic inflation. In the coming months, the annual CPI growth rate will probably decline significantly, while the decline in core inflation will be slower. At the same time, inflation developments in the following quarters are subject to uncertainty, including those related to the impact of fiscal and regulatory policy on price processes, as well as the pace of economic recovery in Poland. In these conditions, the Council decided to keep interest rates unchanged.,

Therefore, it seems that the Monetary Policy Council is implementing the scenario of at least waiting until March for a further decision. So what does the market expect?

Market expectations regarding interest rates in Poland

By financial markets interest rates in Poland may be lower in the following quarters. The current market valuation is as follows: 3-month WIBOR is expected to fall by 40 bp. within half a year, in turn almost 90 bp. the inheritance is valued by autumn. In turn, 130 bps. inheritance is valued within a year.

This is where interesting considerations begin regarding the exchange rate and how consumption and inflation will develop in Poland after the first quarter.

Euro exchange rate, dollar exchange rate and zloty quotations

The euro exchange rate seems to be currently influenced by the decline in inflation in our country with no decline in interest rates. Thanks to this, in terms of the real interest rate, the situation for PLN is improving. When in turn in two/three months inflation will reach the upper limit of the target, and rates do not fall, the zloty may strengthen even more. This, in turn, implies the problem of a high real exchange rate, which makes life difficult for exporters, which, according to BIS, is already the highest since 2008.

However, according to current estimates, inflation will continue to rebound after the first quarter, which in turn may put pressure on the zloty. Then even economic growth may not be enough to save the zloty from weakening. So now, the whole game may depend on what the real interest rate will be. It seems that in the first quarter it will be even positive, and later, if rates are cut and inflation increases, it will become negative, but only to support consumption, not saving.