NBP should not use strong zloty as an excuse – Rabobank

According to Piotr Matys, EM FX Strategist at Rabobank, while Governor Cetinkaya had to raise interest rates in December after the Turkish lira plunged to a record low fuelling inflationary pressure, Governor Glapinski uses the appreciation of the Polish zloty as an excuse to keep the key interest rate at the record low of 1.50%.

Key Quotes

“The zloty ended last year as the second best performing currency rallying more than 20% against the US dollar (only the Czech koruna firmed more than the zloty). Even more impressively, together with its Czech peer the zloty was the only emerging currency that gained versus the euro in 2017.” 

“A strong currency typically tends to be disinflationary by making imported goods less expensive or at least offsetting rising costs of import. To illustrate this point, the price of Brent crude in USD increased by 56% from the 2017 low and by around 155% from the 2016 low. Converting prices into the PLN, Brent crude rose by 44% and 118% respectively.”

“Looking from this perspective it seems that the central bank has a valid argument not to tighten monetary policy despite the rapid pace of growth driven mainly by private consumption stimulated by rising wages and generous child subsidies.”

“We remain of the view that the domestic environment and the structure of economic growth favour a rate hike this year rather than in 2019, as the majority of the NBP led by Governor Glapinski still prefers. Raising rates gradually sooner rather than later would provide the central bank with more room for manoeuvre should the outlook for the Polish economy deteriorate. Keeping rates at the record low for too long may force policy makers to tighten faster if inflation surprises on the upside. The bar for a hike is set high, but we would not dismiss the notion that the NBP may have to seriously consider a shift in its bias in Q2.”