Surging Dollar Boosts Skepticism Over Need for Polish Rate Cuts

Updated on
  • Zloty falls 17% in past year as U.S. moves closer raising rate
  • Brent crude could jump to $65 a barrel in fourth quarter 2016

The zloty’s decline to an 11-year low against the U.S. dollar is another factor damping the economic case for Polish interest-rate cuts.

The currency’s 17 percent drop against the greenback over the last 12 months may put the country, which has experienced deflation since last year, on a higher inflation path, said Piotr Kalisz, an economist at Citigroup Inc.’s unit in Warsaw. While low commodity prices have so far mitigated the inflationary impact of the weaker zloty, the rising global strength of the U.S. currency could make Poland more vulnerable to any up-tick in oil.

Polish currency drops to weakest in 11 years as U.S. moves closer to raising rates.

With Poland’s economy expanding by more than 3 percent, interest-rate cuts demanded by the new government are “unnecessary,” central bank Governor Marek Belka told Puls Biznesu newspaper this week. The zloty will continue to weaken against the dollar amid prospects of monetary policy easing in Poland and expected interest-rate increases by the Federal Reserve, Morgan Stanley strategists said in a research note on Wednesday.

“This slump by the zloty may come back to haunt Poland if oil prices begin to rise,” said Piotr Matys, a foreign-exchange strategist at Rabobank International in London. “Even without rate cuts in Poland, very low interest rates at a time when the Fed tightens could pressure the zloty-dollar rate.”

While the zloty has tumbled against the dollar, it’s up 0.3 percent this year against the euro, the currency of the country’s main export market. Still, as a net buyer of commodities, including oil and gas, Poland has about 30 percent of its imports denominated in the U.S. currency, and only above 10 percent of its exports are dollar-based, according to estimates from Citigroup’s Kalisz.

Brent, Europe’s benchmark crude, has fallen 41 percent in the past year to about $46 a barrel on Thursday, trading near a six-year low reached in August, as slowing global growth and rising stockpiles have led to a global glut. That could reverse next year, with Brent seen rising to $65 in the fourth quarter, according to the median estimate in a Bloomberg survey of analysts.

Rate Bets

Investors have boosted bets for policy easing on expectations the Law & Justice party, which won parliamentary elections last month, will appoint new central bankers who favor cutting rates to spur economic growth.

Forward-rate agreements, derivatives used to speculate on borrowing costs, show scope for more than a quarter-point reduction in rates in the next six months. Eight members of the central bank’s 10-person Monetary Policy Council will be replaced by the parliament and president in January or February, while Belka’s term ends in June.

Poland’s economy expanded 3.4 percent in the third quarter, the fourth-fastest rate in the European Union, and will grow about 3.5 percent in 2016, a Bloomberg survey showed. And while the drop in oil has keep the cost of living down and buttressed the case for cutting rates, the run of deflation that started in July last year is predicted to end in 2015, further limiting the case for cuts in borrowing costs.

The zloty slipped 0.3 percent to 4.0309 versus the dollar at 10:55 a.m. in Warsaw on Wednesday, the weakest since May 2004. Morgan Stanley sees Poland’s currency weakening to 4.15 per dollar in the first quarter, it said in a report Wednesday.

While the zloty rate against the dollar won’t be the decisive factor in increasing inflation in Poland, it will help drive prices up, according to Mikhail Liluashvili, an economist at Credit Suisse Group AG in London.

“The Polish economy doesn’t require any easing at the moment,” he said on Wednesday.