Polish Rate Cuts on a Knife's Edge: How Middle East Tensions Could Upend EUR/PLN and Bond Markets

Poland's National Bank (NBP) has embarked on a cautious rate-cutting path, with inflation projected to drop to 3% in July 2025—within its 1.5%–3.5% target range. However, the geopolitical tinderbox in the Middle East threatens to derail this disinflation narrative, casting uncertainty over the central bank's ability to ease monetary policy further. For investors in Polish bonds and the EUR/PLN currency pair, the interplay between Middle East tensions and energy markets will be critical in determining both short-term volatility and long-term opportunities.

The Disinflation Narrative and NBP's Dovish Turn

The NBP's July rate cut to 5.0% marks a pivotal shift from its earlier hawkish stance. This decision hinges on several tailwinds:
- Electricity price caps extended until September 2025.
- Resolution of Swiss franc mortgage liabilities, easing household debt burdens.
- High base effects from 2024's energy price spikes.

The central bank now anticipates inflation to fall to 3.5%–4.4% in 2025 and 1.7%–4.5% in 2026. Analysts at ING project two more 25-basis-point cuts by year-end, potentially lowering rates to 4.0% by early 2026. Yet, these forecasts assume geopolitical calm.

Middle East Tensions: The Wildcard in Oil Markets

While Middle East conflicts have not yet triggered a full-blown oil crisis, the region remains a critical risk to Poland's disinflation trajectory.

Current Dynamics:
- Oil prices remain subdued despite Israeli-Iranian clashes. Brent crude traded in the mid-$60s–low $70s in July, below January's highs, due to:
- U.S. shale resilience, which can rapidly ramp up production.
- Global oversupply, with inventories rising 93 million barrels in May alone.
- Iran's strategic restraint, avoiding Strait of Hormuz blockades to protect its exports and avoid U.S. retaliation.

The Threat:
- A prolonged conflict or direct infrastructure strikes could push Brent above $90/b, per Goldman Sachs. Such a spike would reverse Poland's disinflation, as energy costs account for 10% of household expenditure and 20% of GDP.

How This Impacts Polish Bonds and EUR/PLN

Poland's bond market is highly sensitive to inflation expectations. A delay in rate cuts would:
1. Boost short-term bond yields, as investors demand higher returns amid inflation uncertainty.
2. Stabilize the zloty, as the NBP's reluctance to cut rates could reduce downward pressure on EUR/PLN.

For the EUR/PLN pair:
- Bearish bias (expecting the zloty to strengthen) is only valid if disinflation confirms in September. If Middle East risks spike oil prices, the NBP may pause cuts, leaving EUR/PLN volatile.

Investment Strategy: Play the Timeline, Not the Narrative

Investors should adopt a wait-and-see approach, with positions contingent on September's inflation data:

1. Short-Term Polish Bonds (1–3 Years):
2. Why: These are less sensitive to rate cuts than long-dated bonds. If Middle East tensions delay easing, yields will stabilize, limiting downside risk.

3. Risk: A premature sell-off in bonds if inflation surprises to the upside.

4. Bearish EUR/PLN Position:

5. Entry: Only if September's inflation print confirms a clear downward trend (e.g., 2.5%–3%).
6. Exit: Monitor oil prices and NBP communications. A breach of $80/b in Brent could trigger a reversal.

Key Risks to Monitor

• Oil Volatility: A 10% oil price spike could add 0.5% to Poland's inflation, per NBP estimates.
• NBP's Caution: Even with disinflation, the central bank may err on the side of pausing cuts to avoid overexposure to geopolitical risks.
• Eurozone Spillover: If the ECB delays its own rate cuts, the zloty could weaken due to carry-trade unwinding.

Conclusion

Poland's rate-cut timeline is now a geopolitical referendum. Investors should remain nimble, prioritizing short-term bonds and EUR/PLN bearishness only after September's data. The Middle East remains the wildcard—until it isn't.

The zloty's fate hangs in the balance—watch the Strait of Hormuz, but place your bets on September's data.