Markets Turn on Poland as Central Bank Plays Politics

Piotr Skolimowski and Selcuk Gokoluk
·6 min read

(Bloomberg) -- Central bank chief Adam Glapinski is steering Poland into dangerous territory.

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Glapinski sent the zloty tumbling on Wednesday when he shocked investors with a 75 basis-point cut in interest rates and his attempts to justify the decision on Thursday only deepened the selloff.

The 73-year-old governor cut a combative figure when he addressed reporters, saying that economists were only serving the interests of the banks and the move would be welcomed by most ordinary Poles. Traders called his bluff, handing Poland’s currency the biggest two-day drop since Russia’s invasion of Ukraine.

Read More: Polish Zloty Set for Worst Week Since Ukraine Invasion

With the US Federal Reserve sticking to its “higher for longer” policy and the dollar trading at new highs, any reduction to the premium on Polish assets was going to be potentially tricky. The outsize cut that Glapinski opted for — in the run-up to a fiercely contested election — was seen by many economists as irresponsible, and patently designed to help out his government allies on the campaign trail.

The risk for Glapinski and his friends in the ruling Law & Justice party is that instead of a pre-election sugar hit for the economy, he stirs up financial turmoil instead. It’s less than a year, after all, since UK Prime Minister Liz Truss was effectively turfed out by bond investors who rejected her own unorthodox take on economic reality.

“He’s giving the market an invitation to short the currency,” said Gordon Bowers, a fixed-income analyst at Columbia Threadneedle Investments in London. “Markets could take the zloty weaker here until the central bank intervenes.”

Regional peers are on notice. In Hungary, where the central bank has been cutting the EU’s highest key rate in full-percentage-point steps since May, policymakers will no longer be on “autopilot” beyond September when it comes to future reductions, Deputy Governor Barnabas Virag said last week. The Czech Republic “won’t act hastily” when it comes to starting rate cuts, Deputy Governor Eva Zamrazilova said in an interview in newspaper Pravo published Friday that was made before the Polish decision.

Poland’s nationalist Law & Justice party has faced criticism for years from the European Union for blurring democratic checks and balances and undermining Poland’s institutions, eventually prompting the European Commission to block billions of euros in funding.

While the party leads opinion polls, a cost-of-living crisis has left some voters cold and it may struggle to hang on to power after the Oct. 15 ballot. With weeks to go before the vote, Law & Justice has flooded the airwaves with pledges to put more state money into Poles’ pockets.

Ludwik Kotecki, a central bank board member appointed by Poland’s opposition who has been critical of Glapinski, called this week’s cut a “mistake” that could be a “serious problem” for the monetary authority’s credibility. An ally on the board, Joanna Tyrowicz, said there was no evidence inflation in Poland is under control.

“The worst thing that could happen is if society decided that the central bank is pursuing other goals than taking care of price stability and the value of the zloty,” he told Business Insider Polska on Friday.

The sentiment echoed main opposition leader Donald Tusk, who on Thursday slammed the rate cut as risky and said Glapinski was trying to boost his party’s election chances. Former central bank Governor Marek Belka, a European parliament lawmaker for the opposition Left party, alleged it was taken after a phone call from the ruling party’s headquarters.

Glapinski was quick to hit back, telling reporters on Thursday that “contrary to what some media are saying, there is no underlying political decision here.”

Read More: Polish Central Bank Chief Plays Political Tune as Term Nears End

Reappointed by Law & Justice to a second term last year, Glapinski has been a long time political ally of the ruling party leader and Poland’s most powerful politician, Jaroslaw Kaczynski. Before the sudden monetary pivot this week, the governor orchestrated a year-long series of rate increases that took the benchmark rate to a two-decade high in September 2022.

The start of hikes in October 2021 also wrong-footed markets and came just hours after Prime Minister Mateusz Morawiecki said that he expected an “appropriate” response to inflation that he described as “worrisome.” Back then, just as now, the governor said the central bank was moving to a wait-and-see mode.

As he continued to raise rates, Glapinski tried to dismiss inflation as the result of Russia’s invasion of Ukraine. In May, the central bank put up a massive billboard on its headquarters in Warsaw that accused its critics of spreading the Kremlin’s narrative. On Thursday, he said the budget presented by the government was “disciplined” and won’t spur inflation despite a wider-than-expected deficit and a surge in borrowing.

Nick Rees, a currency strategist at Monex Europe Ltd. in London, said the governor’s performance made it difficult to make a case for the tumbling zloty.

“By cutting faster than expected, suggesting more cuts are yet to come and blowing up his credibility with markets, it seems likely that Glapinski has turbocharged that move,” he said.

Glapinski hasn’t been shy about wading into politics in the past.

In an interview with a government-friendly weekly last year, he said Tusk, former European Council president, has been tasked by Brussels to bring down the Polish government and to introduce the euro. The remarks sparked a rebuke from German embassy in Warsaw.

While markets may have shrugged off a smaller cut this week, because an argument could be made that inflation is slowing and high rates have undercut struggling economic growth, the magnitude was a shock and investors were taken aback by Glapinski’s response to questions about the decision.

Market bets were already signaling more than two percentage points in rate cuts over the next year. But most economists predicted the easing would start slowly with a quarter-point reduction. Glapinski argued on Thursday the decision was “overdue” and that inflation — at 10.1% in August, but slowing rapidly — may return to the central bank’s tolerance range as early as mid-2024.

With the zloty in a slide on Thursday, he said the central bank isn’t going to intervene and the zloty will “defend itself” because the economy is in good shape and the impact from depreciation on the currency was negligible. The currency should stabilize after the election, he added.

Rushing the move may eventually backfire, if not economically, then politically, according to Guillaume Tresca, global EM strategist at Generali Investments in Paris.

“The short-term impact on the economy and so the economic benefits for the politicians ahead of the elections will be likely limited,” he said “It could even have the opposite impact. The zloty depreciation could be seen negatively.”

--With assistance from Patrick Donahue.

(Updates with zloty movement, regional risk, Kotecki comments from second paragraph.)

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