Zloty Gains After Polish Official Signals Government Has Tools to Prop Up Currency

Konrad Krasuski and Wojciech Moskwa
·3 min read

(Bloomberg) -- Poland’s government moved to contain a selloff in the zloty a week after the central bank blindsided markets with an unexpectedly sharp interest-rate cut, as a senior official pledged to intervene to prop up the currency. The zloty surged.

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Pawel Borys, an aide to Prime Minister Mateusz Morawiecki, said the administration has the tools to strengthen the zloty to an “optimal level.” In an interview, he also admonished the central bank, which delivered a rate cut three times bigger than forecast on Sept. 6, to weigh the impact on the zloty in future decisions.

It was clearest sign yet that the government in Warsaw is anxious about the zloty’s tailspin after central bank Governor Adam Glapinski last week defended the cut as warranted by ebbing inflation and a slowing economy. The decision triggered accusations that the move was a political stunt meant to help the ruling Law & Justice party before an election, now less than five weeks away.

“The government has instruments that have already been effective in 2022 in striving to make the exchange rate optimal,” Borys told Bloomberg on Wednesday, referring to an intervention last year. “The zloty’s liquidity has already fallen, which should stabilize the zloty.”

Read more: Markets Turn on Poland as Central Bank Plays Politics

Borys put the currency’s optimal level at 4.4-4.6 to the euro as “it’s then not too strong for exporters, but also not too weak to generate inflation pressure.” The zloty climbed as much as 0.8% and traded at 4.6274 at 1:27 p.m. local time. Markets indicated that an intervention was under way, with the zloty-euro basis swap used to gain liquidity in the currency rising.

Be Careful

The zloty rout reverberated through the region this week, raising speculation among market strategists that policymakers will have to put the brakes on plans to ease monetary policy. Currencies for the Czech Republic and Hungary led losses across emerging markets.

In Warsaw, the political dimension was unavoidable. Law & Justice made gains in a poll that showed it within reach of a parliamentary majority after the Oct. 15 contest. The survey, which also showed a sharp drop for the opposition Civic Coalition, was taken in the days after the rate cut.

Glapinski’s decision for a jumbo cut, even after he had signaled a quarter-point reduction, was viewed as irresponsible by many economists — as well as politicians who said it was a bid to help his allies in the ruling party.

Read more: Polish MPC Member Litwiniuk Urges Verbal Zloty Intervention

The decision “was a surprise for the financial markets and for me,” Borys said. The comments undercut those of other officials who hours earlier sought to play down the drop. Central bank policymaker Wieslaw Janczyk told PAP news agency that the currency valuation would benefit exporters.

In October last year, Poland sought to shore up the zloty by deliberately tightening liquidity in derivative instruments, making it prohibitively expensive for foreign investors to short the zloty, the prime minister’s adviser said at the time.

Borys runs the government’s development fund and has been a key figure behind its economic policy — from designing the country’s response to the Covid-19 pandemic to arranging financing for the country’s investment push.

Poland’s economy contracted in the second quarter, helping inflation slow rapidly from 18.4% in January to 10.1% last month. Borys said the recovery should start to take hold before the end of the year.

“I still believe that the Polish economy is following a soft-landing scenario,” he said. “As for the pace of rate cuts, one needs to be careful.”

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