Interest rates unchanged in 2024?

There was a prospect of keeping interest rates unchanged. This was communicated quite clearly yesterday by the head of the Monetary Policy Council, Professor Adam Glapiński.

Even though he expects inflation to be within the March target, he emphasizes that inflation will accelerate significantly in the second half of the year, which may provide a basis for keeping interest rates unchanged. However, if the Fed starts cutting interest rates this year as announced, could this open the way to a much stronger zloty?

Inflation may accelerate in the second half of the year

Already at this point, the market had significantly reduced its expectations towards interest rates in Poland. In the next 6 months, he sees a chance for only one interest rate cut. On the other hand, it is difficult to expect that the Monetary Policy Council will decide to cut rates at a time when forecasts indicate that inflation may accelerate significantly in the second half of the year. In a worst-case scenario related to administered prices inflation may increase up to 8%! This, of course, would require the return of the VAT rate on food to 5% and the unfreezing of energy prices. Although the scenario of inflation rebounding to 8% seems extreme, it is not divorced from reality.

Therefore, if interest rates were to remain unchanged (main rate at 5,75%), in the US we would experience 3 interest rate cuts (from the current level of 5,5% to 4,75%), The path potentially opens up for further significant strengthening of the zloty. In such a case, the average levels from 2016-2021 would be within reach, i.e. around PLN 3,70 per dollar! This is over 30 cents less than currently. But is this scenario realistic?

The Polish economy is strong

It is worth remembering that excessive inflation is not good for the economy and the exchange rate. Therefore, if inflation continued to decline in the US and rise in Poland, even with a large difference in interest rates, the exchange rate would not necessarily reach 3-year lows. Secondly, high interest rates they reduce the competitiveness of the economy and limit economic growth itself. The Polish economy is strong, but it is coming off a very weak 2023.

On the other hand, we still have relatively strong data from the US, and the prospect of lower interest rates could open the prospect of a clear economic recovery in this country. As you can see, the prospects for further strengthening of the zloty are not so clear. Nevertheless, if economic activity in Poland rebounds and inflation stabilizes in the range of 4-6%, then further strengthening of our currency is not ruled out.

We are observing stabilization on the market. The dollar has lost slightly in recent sessions, and stock indices on Wall Street have remain at historic highs. China is starting to celebrate the Chinese New Year, which may mean a reduction in market volatility, although at the same time we are still dealing with uncertainty regarding the situation in the Middle East.

After 09:15 a.m. we pay PLN 4,0102 for a dollar, PLN 4,3205 for a euro, PLN 5,0628 for a pound, PLN 4,5824 for a franc.

Source: Michał Stajniak CFA, XTB