Zloty Gains Momentum as NBP Signals Caution in Rate Cuts

The Polish zloty (PLN) has strengthened in recent weeks following signals from the National Bank of Poland (NBP) that its rate-cut cycle will proceed cautiously, underscoring a shift in monetary policy tone. Despite reducing its benchmark reference rate by 50 basis points in May 2025—the first easing since October 2023—the NBP’s emphasis on data dependency and a June pause in further cuts has bolstered the currency’s appeal.

The Rate Decision and Forward Guidance

In May, the NBP trimmed its reference rate to 5.25% from 5.75%, marking the start of what Governor Adam Glapiński termed a “gradual, data-dependent easing cycle.” However, the central bank’s forward guidance struck a cautious tone:
- A June rate cut is unlikely, with the next potential adjustment deferred to July or later, contingent on inflation data.
- Future cuts will occur in 25-basis-point increments, signaling a slower pace than the 50-bps reductions markets had initially priced in.

This pivot toward caution, despite falling inflation, reflects the NBP’s vigilance toward risks such as energy price volatility and fiscal expansion. Analysts at ING Bank Śląski now project a terminal rate of 4.5% by year-end, with further easing to 3.75% by late 2026—a more conservative path than earlier aggressive forecasts.

Inflation and Economic Context

The NBP’s caution is rooted in recent economic data:
- Inflation has cooled to 4.2% year-on-year (YoY) in April 2025, down from 4.9% in Q1, driven by lower global oil prices, a weaker U.S. dollar, and a high base effect from a 2024 food VAT hike.
- Wage growth slowed to 7.7% YoY in March, easing pressure on core inflation.
- GDP growth, however, remains sluggish, with Q1 2025 data undershooting expectations.

The NBP projects inflation to dip to 3.5% by Q3 2025, though risks persist from potential energy price hikes and expansionary fiscal policy. These factors justify the central bank’s reluctance to accelerate easing.

Market Reaction: Zloty’s Appreciation Dynamics

The zloty has benefited from the NBP’s measured approach, particularly against the euro. While the EUR/PLN rate traded at 4.2763 in late May—within a tight range above 4.25—the currency’s stability reflects reduced speculation around aggressive rate cuts. Key trends include:
- Bond markets: Ten-year Polish government bond yields declined by 12 basis points post-May decision to 4.3–4.4%, reflecting reduced inflation risks but tempered by the NBP’s cautious stance.
- Equity markets: The Warsaw Stock Exchange’s WIG index rose 0.5% in the week following the rate decision, with real estate and consumer sectors gaining from lower borrowing costs.

Risks and Outlook

Despite the zloty’s resilience, challenges loom:
1. Energy Prices: A rebound in global oil prices or domestic energy cost increases could reignite inflationary pressures.
2. Fiscal Policy: Poland’s 6.6% GDP deficit—the EU’s second-highest—raises concerns over fiscal discipline.
3. Global Dynamics: The U.S. Federal Reserve’s potential rate cuts and geopolitical risks in Eastern Europe could influence capital flows.

Conclusion

The zloty’s recent appreciation reflects the NBP’s successful recalibration of market expectations. By signaling a slower rate-cut pace and emphasizing data dependency, the central bank has curbed excessive dovish bets while maintaining inflation control. With inflation projected to fall further and global tailwinds favoring emerging markets, the zloty appears poised to stabilize, though risks tied to energy and fiscal policy remain.

Investors should monitor Q2 inflation data and the NBP’s July meeting, where a 25-basis-point cut is likely, but the central bank’s caution ensures the zloty’s trajectory remains tied to macroeconomic fundamentals. For now, the currency’s resilience underscores the effectiveness of a balanced monetary policy approach.