On Friday, the Polish zloty (PLN) weakened along with other emerging European currencies, dropping from 2-year highs it reached on Thursday. The Polish currency was the biggest winner among emerging-market currencies recently, with some speculating that the Polish currency was boosted by the government. Investors are also currently concerned about potential risks for the Polish economy.
Potential economic risks
Economists have noted that investors may worry about the European Court of Justice’s (ECJ) verdict on Swiss franc loans as well as the government’s spending promises which may hinder measures to control inflation.
The ECJ is expected to rule in mid-June on whether banks may charge interest on Swiss franc mortgages that have been invalidated. A negative verdict could incur massive costs to the banking sector which are estimated to reach up to PLN100bn. Such a verdict will hurt the zloty and Polish government bonds.
Polish banks have faced difficulties with the unwinding of foreign exchange mortgage loans costing up to PLN30bn. Many domestic courts have ruled against banks, favouring borrowers since they have identified abusive clauses, such as unclear currency-linking mechanisms in the mortgage contracts which they have terminated.
Zloty has benefited from economic data and fading expectations of rate cuts
Since mid-April, the zloty has strengthened following better-than-expected economic data and waning expectations of quick interest rate cuts. At the same time, it has struggled against a stronger US dollar.
While Poland’s central bank has not officially ended its rate hiking cycle which has been on pause, central banker Ireneusz Dabrowski said on Thursday that rate cuts in Poland could be possible at the end of 2023. “In my personal opinion… such a space (for rate cuts) may appear at the end of the year,” Dabrowski told the money.pl website. “If the council starts to consider cuts, it will be supported by economic data and will certainly not be hasty.” However, his comments didn’t move the zloty.
Analysts have said the zloty could weaken as the dollar is strengthening against the euro. The euro dropped following data showing that the economy of Germany entered recession. Central Europe’s economies have faced challenges since the middle of last year due to a decline in foreign demand and rising inflation hitting consumers.
Finance Minister refutes claims that government has boosted zloty
Poland’s Finance Minister Magdalena Rzeczkowska recognised the zloty’s recent appreciation to the highest level in two years and pushed back against comments that the government was backing the zloty’s advance. She explained that the currency was simply getting back to levels before the war. “We are not getting too much appreciation of the currency,” Rzeczkowska told Bloomberg Television in an interview at the Qatar Economic Forum in Doha on Tuesday. “We’re just getting back to the levels from before the war, so I think the situation is quite OK.”
Citigroup Inc. economists have expressed the opinion that the Finance Ministry helped to boost the zloty by exchanging more foreign currency on the market. Responding to such claims, Rzeczkowska said that it “isn’t exactly the truth,” and that “The Ministry of Finance isn’t really present on the market. It all depends on the situation with the dollar and with the euro and the actions of the central banks.”
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