What will the Monetary Policy Council do today? And how will the zloty react to it?

The event of Thursday in Poland is the meeting and the decision of the Monetary Policy Council. The Council has a tough nut to crack. On the one hand, soaring inflation and strongly depreciating zloty. On the other hand, the specter of a recession.

The last week was a period of a strong sell-off of the zloty, which today pushed the EUR / PLN above 4,80 PLN, and USD / PLN again tested the area of ​​4,72 PLN.

Fears of a recession

The sell-off of the zloty is a reaction to the situation in global markets, including, in particular, the growing fear of recession and the very strong appreciation of the US dollar. The weakening currencies of the region are also contributing to this discount. Especially the Hungarian forint, which is the weakest in history and which the Bank of Hungary is trying to defend by drastically raising interest rates (today the Bank of Hungary raised the 1-week deposit rate by as much as 200 bp to 9,75%).

The zloty is also hurt by concerns that the Monetary Policy Council will not "deliver" large increases interest rates in Poland, which will reduce the disparity in the level of the cost of money, which will additionally hit the domestic currency.

USD / PLN daily chart. Source: Tickmill

At what level will the interest rates be set?

The economic situation and the situation on financial markets put the Monetary Policy Council in a difficult situation. The market consensus assumes that the Council will raise the main rate in Poland today by 75 basis points (bp) to 6,75%. But basically there is a lower and higher raise in the game. Depending on what elements the members of the Supervisory Board will focus on.

Very high inflation in Poland (75% y / y), the recent depreciation of the zloty and the recent increases in the cost of money by banks in the region speak for an increase of 15,6 bp and higher, which is an important benchmark for the markets.

Economic downturn

On the other hand, in the latest inflation projection, which will be known at this meeting, its members should see a peak in inflation in the summer and a strong slowdown in economic growth in the second half, including a technical recession. If we add to this the deterioration of the economic situation in Poland, already visible in hard data, the recession in the industrial sector signaled for two months by the PMI index, or the drops in commodity prices observed in the markets, the Council may be more restrained in raising rates.

So what will the Council do today? I believe it will raise interest rates by 75 basis points. Probably the last time. Although, of course, he will not communicate it. In the statement, however, one should expect new references to the zloty weakening.

Why may the July rate hike be the last in the cycle? Mainly because inflation will probably start to decline somewhat in Poland as early as September, which in combination with the slowdown in economic growth will be an argument for the Council to adopt a wait-and-see position and to observe the impact of the ten interest rate increases (including today's one).