Poland's Monetary Crossroads: Betting on Bonds and the Zloty Ahead of 2026 Rate Cuts

Poland's Monetary Policy Council (MPC) stands at a pivotal juncture. With inflation pressures easing and political uncertainty looming, the path to monetary easing has become a focal point for investors. While Governor Adam Glapiński has maintained a hawkish stance—stressing that rate cuts are “not on the table until 2026”—dovish MPC member Ludwik Kotecki has injected optimism by signaling potential reductions as early as July 2025. This divergence in views has created a compelling opportunity for investors to position for Poland's eventual pivot toward accommodative policy, particularly in government bonds and the zloty.

The Case for 2026 Rate Cuts: Kotecki's Signals and Analyst Projections

Kotecki's recent remarks highlight a nuanced outlook. While he has not explicitly called for a full 100 basis points (bps) reduction in 2026, his emphasis on a “data-dependent” approach underscores the possibility of cumulative cuts if inflation trends align with expectations. In January 2025, he argued that Poland's central bank could begin trimming rates as early as mid-2025, with 50–100 bps of easing feasible this year. Analysts at ING and the IMF have since extrapolated this to suggest a cumulative 100 bps reduction by early 2026, contingent on falling inflation and a resolution of fiscal policy uncertainty.

Inflation Dynamics: The Catalyst for Easing

Poland's inflation, while still elevated at 5% in early 2025, has shown signs of moderation. Key drivers include:
- Zloty Strength: A 6% appreciation against the euro in 2025 has dampened import-driven inflation.
- Energy Price Caps: The freeze on household electricity tariffs, set to expire in late 2025, could reduce headline inflation by 1–1.5% points when lifted.
- Global Commodity Trends: Declining oil prices and geopolitical shifts have reduced external cost pressures.

However, risks persist. Wage growth, stuck near 10% year-on-year, continues to fuel core inflation, which remains stubbornly high at 4%. Should wage settlements accelerate—a risk tied to upcoming presidential elections—this could delay the NBP's pivot to easing.

The Zloty's Valuation: A Trade to Watch

The zloty (PLN) has historically been a barometer of Polish monetary policy. With the NBP's policy rate at 5.25%—well above the ECB's 2.5%—the currency has gained 15% since late 2023. Yet, the zloty's valuation is now a double-edged sword:

• Bullish Case: If inflation trends validate rate cuts, the PLN could strengthen further as the yield differential narrows. A drop in 10-year bond yields from 4.5% to 3.5% by mid-2026 would amplify this effect.
• Bearish Risks: Fiscal slippage (the deficit is projected to hit 5.5% of GDP in 2025) and election-driven policy shifts could spook investors, reversing the zloty's gains.

Investment Strategy: Timing the Pivot

Investors seeking to capitalize on this transition should focus on duration plays and currency carry trades, with an emphasis on Q3 2025—a critical inflection point.

Duration Plays in Polish Bonds

• Entry Point: Buy Polish 10-year government bonds (currently yielding ~4.5%) ahead of the NBP's September 2025 meeting.
• Rationale: If Kotecki's advocacy for cuts prevails, yields could drop to 4.0% by year-end, offering a 5% price gain.
• Risk Mitigation: Hedge against inflation surprises via short positions in energy futures or PLN-denominated inflation swaps.

Zloty-Cross Trades

• Pair of Choice: EUR/PLN: A short position here targets a return to pre-2024 levels (1:4.35) from the current 1:4.10.
• Timing: Execute after the presidential election in October 2025, when political uncertainty fades and rate-cut expectations solidify.
• Contingencies: Pair the trade with a cap on EUR/PLN above 4.25 to limit losses if inflation surprises upward.

Risks to the Outlook

1. Election Uncertainty: A left-wing victory in October's presidential election could lead to fiscal stimulus, reigniting inflation.
2. Wage Inflation: If core inflation remains above 3.5% by mid-2025, Glapiński's hawkish stance could dominate, delaying cuts.
3. External Shocks: A global recession or commodity price spikes could reverse the zloty's gains.

Conclusion: A Calculated Bet on Polish Assets

While risks are material, the confluence of easing inflation, zloty strength, and Kotecki's dovish influence makes Poland's fixed income and currency markets ripe for strategic positioning. Investors who act decisively by Q3 2025—when political clarity emerges—could secure asymmetric returns as the NBP inches toward its first rate cuts in years.

As the old adage goes, “Don't fight the central bank.” In Poland's case, the fight is already shaping up to be a worthwhile wager.