Poland's central bank likely to raise interest rates sharply to rescue zloty

Leszek Szymański/PAP

Polish interest rates might be increased on Tuesday by at least 50 basis points, with some economists expecting a 75-bps or even a 100-bps hike, as the Polish zloty suffers from unprecedented losses and volatility.

Despite FX interventions taken by Poland's central bank and the finance ministry, the zloty has been weakening against the euro in recent days amid market uncertainty caused by the war in Ukraine. 

On Monday, the exchange rate briefly hit 5 zloty against the euro, setting a new record. 

Some analysts have pointed out that the zloty is weakening more than other currencies in the CEE region due to its liquidity, while others have underlined that the protracted crisis in Ukraine makes investors perceive the zloty as a more risky asset, owing to Poland's proximity to Ukraine.

High interest rates make loans and mortgages more expensive and may subdue GDP growth as a consequence; however, Poland's central bank had been forced to embark on a series of interest rates hikes even before the war, starting in October 2021. 

Back then, rates were raised to suppress soaring inflation amid an energy crisis and global supply chain disruptions caused by the Covid-19 pandemic. 

Now, with the war putting additional pressure on inflation and the Polish currency, the market is expecting a larger hike in interest rates than before. 

According to a median forecast of 20 local analysts in a PAP consensus survey, Poland's Monetary Policy Council (MPC) will likely add a 50 bps interest-rate hike on Tuesday to the 265 bps in hikes passed since October, which will bring the reference rate to 3.25 percent. 

Local experts are now expecting the main interest rate to come at 4.00 percent at the end-H1 and say it could hit 4.25 percent in December. Before the war, the end-of-year projections was 4 percent. 

Amid increased inflationary risk and the zloty's recent weakness, analysts are split even more on the scale of monetary policy tightening than in previous months. Specifically, 13 analysts expect a 50 bps hike and seven expect bolder moves from the MPC - four analysts forecast a 75 bps hike, two players expect a 100 bps move and one analyst is betting on a 125 bps hike.