Zloty Weakens Despite Rising Rate Hike Expectations in Poland

The Polish zloty has been weakening despite growing market expectations of interest rate hikes in Poland. Since the September Monetary Policy Council (MPC) meeting, the euro has risen from PLN 4.3153 to PLN 4.3718, a 1.3% increase. Forward market data from September 28 shows a rising path of expected rates in Poland, from 4.01% for the 1x4 contract to 5.06% for the 9x12 contract. Typically, such expectations would support the currency, but the zloty remains under pressure.

The market is pricing in the strongest monetary policy tightening in Poland compared to the eurozone and the US. For Poland, the expected rate increase between the 1x4 and 9x12 contracts is 105 basis points, compared to 75.5 bps for the euro and less than 60 bps for the dollar. However, US rates remain higher in the shorter terms, only being surpassed by Poland in the 9x12 contract.

The National Bank of Poland (NBP) has kept its reference rate at 3.75% since March, with President Adam Glapiński maintaining a "wait and see" approach. The November MPC meeting, where a new macroeconomic projection will be presented, could be a key date for the market. Some council members are open to rate hikes this year if inflation remains high, while others prefer to keep rates unchanged for several more quarters.

Several factors are contributing to the zloty's weakness. Some expected hikes may already be reflected in asset prices, and if the MPC does not provide new arguments for tightening, market expectations may scale back. The global situation favors the dollar, with US rates remaining high and bond yields among the highest in years. Additionally, Moody's downgraded Poland's rating in September, citing challenges related to public finances, which may increase the risk premium on Polish bonds. Deteriorating sentiment towards emerging market currencies is also affecting the zloty.