Polish Zloty Faces Crosscurrents as Inflation Decline Fuels Rate Cut Speculation

The Polish zloty (PLN) has remained relatively stable against major currencies in early 2025, despite growing expectations of monetary easing following a sharp decline in inflation. With annual inflation dropping to a 9-month low of 4.2% in April, the national bank of Poland (NBP) faces mounting pressure to cut interest rates, potentially altering the zloty’s trajectory in the months ahead.

Inflation Slows, Rate Cut Odds Rise

Poland’s inflation slowdown, driven by falling fuel costs, transport deflation, and moderated wage growth, has shifted market focus from tightening to easing. The April inflation print of 4.2% not only undershot forecasts but also marked the lowest level since July 2024. Key factors behind the decline include:
- A -3.6% year-over-year (y/y) drop in transport costs, aided by improved supply chains and energy price caps.
- Fuel prices plunging 8.3% y/y, as global oil prices weakened and the U.S. dollar depreciated.
- Wage growth slowing to 8.4% annually, easing labor-cost-driven inflation risks.

This trend has reignited speculation about an imminent NBP rate cut. shows the central bank’s reluctance to ease since October 2023, but analysts now project 75 basis points (bps) of cuts by year-end, with the first reduction possibly arriving in July or September.

Zloty Dynamics: Strong, but at a Crossroads

The PLN has held its ground against the U.S. dollar and euro in early 2025, with exchange rates remaining flat amid mixed macro signals. As of May 2025, 1 PLN traded at ~$0.263 and €0.233, reflecting its strongest real effective exchange rate since 2008. However, the zloty’s resilience may be short-lived if the NBP embarks on an easing cycle.

While a weaker zloty could boost Polish exporters, the currency’s strength has already tightened financial conditions, potentially stifling economic growth. Analysts at Capital Economics caution that a 25-50bps rate cut in May could trigger a gradual depreciation, aligning the PLN with emerging-market peers.

Risks and Challenges

Despite the inflationary reprieve, Poland’s economy faces headwinds:
1. External Shocks: U.S.-EU trade tensions or new tariffs could disrupt Poland’s export-driven economy, which accounts for 40% of GDP.
2. Fiscal Vulnerabilities: Public debt is projected to hit 57.7% of GDP in 2025, limiting fiscal flexibility to counter potential downturns.
3. Sectoral Disparities: Housing costs remain elevated at 10.1% y/y, posing a risk if energy prices rebound or labor shortages resurface.

Conclusion: Navigating a Delicate Balancing Act

The zloty’s near-term stability hinges on the NBP’s policy decisions and external factors. With inflation on track to hit 4.1% in 2025 and core inflation plateauing, the central bank is likely to pivot toward easing, potentially trimming rates to 5.25% by year-end.

Investors should monitor two key indicators:
- Monthly inflation releases: A sustained decline below 4% could accelerate rate cuts.
- Geopolitical risks: Escalating trade disputes or energy price spikes could destabilize the zloty.

While the PLN’s strength has provided a buffer against inflation, the path forward is fraught with uncertainty. For now, the zloty remains a tightly wound spring—poised to react decisively once the NBP’s hand is forced.

Final Note: The zloty’s fate is inextricably tied to the NBP’s next move. With data pointing toward a “soft landing,” investors may want to position for a gradual depreciation—provided inflation continues its downward march.