This year’s top currency in emerging markets is keeping Poland’s economy up and its inflation down. Not surprisingly, the central bank wants more of the same.
The zloty is off to the biggest surge against the euro among developing nations in 2017, making the central bank’s job easier by driving down the cost of imports. The appreciation has helped stop inflation in its tracks after a rebound that started late last year. May data due on Wednesday will show the annual price index remained unchanged at 2 percent for a third month, according to the median of 26 estimates in a Bloomberg survey.
Although “the economy is taking off at full throttle, partially thanks to a strong zloty it’s not yet leading to any excessive price gains,” Piotr Poplawski, an economist at ING Bank Slaski SA, said by phone.
Lifted by Poland’s improving growth prospects and a renewed interest among foreign investors in zloty bonds, the currency is on track for the longest streak of monthly gains against the euro in nine years. The appreciation has given consumers the confidence to keep spending but stopped short of a level that threatens the competitiveness of exporters.
When it comes to the zloty, the best response central bank Governor Adam Glapinski could muster last week is that “almost every gauge of real value” still points to its undervaluation.
By putting a brake on prices, zloty gains are allowing the central bank to keep its policy mix in place, including Poland’s longest-ever pause in interest rates. A stronger exchange rate isn’t getting in the way of economic growth. In the first three months of 2017, gross domestic product added 4 percent for its biggest annual jump in five quarters.
“Despite the accelerating economic growth, one shouldn’t expect faster price growth because the effect of higher fuel prices should fade,” said Jakub Borowski, chief economist at Credit Agricole SA in Warsaw. “The consumer-price index will remain stable in the second half of the year, or possibly even fall.”
The exchange rate is now below 4.18 against the euro, past a threshold last breached in August 2015. That’s also below the 4.20-4.40 range that Deputy Prime Minister Mateusz Morawiecki described last month as a “good level.” While the zloty is up more than 5 percent this year, its volatility — previously a trigger for central bank interventions — is near the lowest globally.
Glapinski believes the exchange rate helps keep the economy in balance and says the Polish currency remains “at competitive levels.” Morawiecki agrees, telling Interia.pl on May 16 that the zloty’s growth is “generally positive” for businesses.
But currency pass-through is becoming a less potent tool for keeping Poland’s inflation in check, according to local units of Credit Agricole and BNP Paribas SA. An appreciation of 10 percent would curb inflation by 0.7 percentage point over a period of up to 10 months, Michal Dybula, Warsaw-based economic strategist at Bank BGZ BNP Paribas, said by phone.
“The impact of the exchange rate is dropping gradually,” Dybula said. “That means domestic factors, especially wages, are having a bigger influence on prices.”