Thursday is by far the most important day of the week for global markets. US inflation may eventually decide the outlook for Fed policy. The European Central Bank should maintain its current policy and reduce inflation. Yesterday, NBP took a similar step that reached the zloty.
The euro / Polish zloty rose to more than 4.47. The dollar rose by about 0.03 PLN from around 3.65 PLN. The value of the franc is estimated at 4.10 Polish zloty. Major currencies are the most expensive in a week, only the pound still costs less than PLN 5.20. The Monetary Policy Board has indicated unequivocally that it is very reluctant to abandon its very moderate stance. If consumer price growth stops growing and its peak is confirmed by inflation expectations for July, calls for price hikes in the second half of the year will be among the fictional. In other words, monetary authorities continue to assume that price hikes are temporary. Although pressure to tighten is building, he hasn’t blinked an eye, and policymakers are firmly committed to their position.
This situation does not help the zloty and confirms our judgment that the scope for its short-term strengthening is exhausted. Investors may also return to betting that differences in the policy trajectories of individual central banks in the region will translate into a worse performance of the Polish currency compared to the forint or the Czech koruna, which will be an additional burden.
Meanwhile, the EUR/PLZ will have room for stronger increases and a rebound from the 5% drop in relation to the May highs only after returning above 4.50. In a broader sense, we expect the euro exchange rate to fall at the end of the year to 4.40 PLN, and the dollar will be priced below 3.60 PLN. The main driver of the appreciation of the zloty in the second half of the year will be the mild global financial conditions. This will be the result of the Fed’s lack of rush to abandon crisis policy tools. Combined with strong global economic growth, this will lead to a favorable environment for capital inflows to emerging markets.
In 2021, the average annual CPI inflation rate will significantly exceed the acceptable deviation from the NBP target (+/- 1% range around 2.5%). There is no doubt that the risks of inflationary pressures spiraling out of control have increased. This is supported by the path of core prices, whose dynamics remained constant at 4%. It can rise from these ceilings after lifting restrictions. This is also supported by a healthy labor market recovering from the pandemic in good shape. Finally: strong economic growth also speaks of it – the dynamics of GDP this year and next should exceed 5%.
However, the MPC statement beats caution and conservatism. Threats are still being underestimated. It is absurd to look in the document for a shadow to announce that there may be an increase at any moment. As a result, it should be viewed from the perspective of a bucket of cold, even icy water pouring over the hot heads of market participants. The still-existing aversion to the stronger zloty can also be of importance to the position of the decision makers.
The market wanted so much to believe in the possibility of a rate hike this year that it almost forgot the characteristics of the National Bank of Poland – the region’s most moderate central bank. As a result, the high level of expectations was painfully eliminated. Our opinion confirmed that a tightening faster than in the middle of 2022 is the last resort of the Polish monetary authorities, and the positive impact of this factor on the zloty has been exhausted. Ba! It has even become a threat to the Polish currency, which was confirmed by Wednesday’s session.
Yesterday morning’s market assessment assumed that the cost of money would rise by about 35 basis points over a six-month horizon. For comparison, the CZK and the forint reduced the upward movement by about 55 basis points. The difference is that other central bankers in the region have clearly announced a tightening of measures.
They warn that increases are closer than the market assumes (Czech Republic) or clearly indicate they will happen in June (Hungary). However, President Adam Glapinsky did not offer an exit strategy from the crisis policy, the culmination of which was to raise interest rates next year. More information on the MPC’s plans will be made available through the online conference on Friday.