The Zloty's Double-Edged Sword: How Poland's Currency Gained Strength and the Cost to its Central Bank

The Polish zloty (PLN) surged to a 20-year high against the U.S. dollar in 2024, a feat celebrated as a testament to Poland’s economic resilience. Yet behind this success lies a hidden cost: the National Bank of Poland (NBP) reported a staggering $3.6 billion loss for the year. This article explores how the zloty’s robust performance—driven by hawkish monetary policy and inflation control—led to unexpected financial strains on the central bank, while reshaping Poland’s economy and investment landscape.

The Rise of the Zloty: Causes and Consequences

The NBP’s aggressive monetary tightening, which kept its policy rate at 5.75% through 2024, played a central role in the zloty’s strength. By mid-2024, the real effective exchange rate (REER) of the zloty had risen by over 20% since mid-2022, outpacing inflation differentials with trading partners. This appreciation stemmed from two key factors:
1. Interest Rate Differentials: Poland’s high policy rates attracted foreign capital, boosting demand for the zloty.
2. Inflation Control: Annual inflation plummeted from a peak of 16.6% in April 2023 to 4% by October 2024, making Poland a relative safe haven for investors.

However, this strength came at a cost. A stronger zloty reduced the value of foreign currency-denominated assets held by the NBP, such as U.S. Treasuries or euro-zone bonds. As the zloty appreciated, these holdings lost value when converted back into PLN—a classic case of foreign exchange valuation losses. The NBP’s balance sheet, which relies on foreign reserves to stabilize the currency, bore the brunt of this revaluation.

The NBP’s Financial Strain

While the central bank’s exact loss calculation isn’t detailed, the mechanics are clear. For example, if the NBP held $50 billion in foreign reserves at the start of 2024, a 10% zloty appreciation would translate to a ~$5 billion loss in PLN terms. Compounded by interest rate fluctuations and geopolitical risks, such losses could easily reach the reported $3.6 billion.

The NBP’s reserves, however, remain 160% of the IMF’s adequacy metric, signaling no immediate liquidity crisis. Yet the loss underscores a broader dilemma: monetary policy designed to stabilize the currency can inadvertently drain central bank coffers.

Economic Winners and Losers

The zloty’s strength had uneven effects across Poland’s economy:
- Winners:
- Consumers: Imported goods became cheaper, easing inflationary pressures.
- Banks: Commercial banks reported a net financial result of PLN 42 billion in 2024, up from PLN 27.6 billion in 2023, fueled by wider net interest margins.
- Debtors: Households and firms with foreign-currency loans saw debt burdens shrink.

• Losers:
• Exporters: A 20% REER appreciation eroded cost competitiveness, contributing to stagnant exports. Key industries like manufacturing and agriculture faced reduced demand from EU partners.
• Fiscal Policy: The government’s deficit rose to 5.9% of GDP in 2024, partly due to higher public-sector wage growth and social spending.

The IMF’s Warning: Balancing Act Ahead

The IMF cautioned that Poland’s “hawkish” monetary policy, while successful in taming inflation, risks overvaluing the zloty. A persistently strong currency could harm long-term growth, as export-driven sectors stagnate. The IMF urged fiscal consolidation to reduce deficits and avoid overburdening the NBP.

Investment Implications

1. Equity Markets: Banks and consumer discretionary sectors thrived in 2024, but investors should watch for risks tied to export-dependent firms.
2. Currency Plays: The zloty’s appreciation may attract carry-trade investors seeking high yields, though geopolitical risks (e.g., Ukraine tensions) could destabilize it.
3. Government Debt: Polish bonds remain attractive due to low inflation and strong reserves, but fiscal discipline is critical to maintaining confidence.

Conclusion

The NBP’s $3.6 billion loss in 2024 is a stark reminder of the trade-offs in managing a strong currency. While the zloty’s appreciation bolstered inflation control and financial stability, it exposed vulnerabilities in foreign exchange reserves and export competitiveness. The central bank’s challenge now is to navigate this fine line—maintaining monetary discipline without stifling growth or draining reserves further.

With Poland’s economy projected to grow 3.5% in 2025 (supported by EU funds and domestic demand), and the zloty’s REER remaining elevated, investors should focus on sectors insulated from export pressures while monitoring fiscal policy closely. The NBP’s balancing act will determine whether this “robust zloty” era becomes a model of stability or a cautionary tale of unintended consequences.