Currency report: Złoty still going down

On Friday the USD/PLN reached zł.3.14 and EUR/PLN tested the resistance at zł.3.99. The Polish currency has dropped since mid-August, when a euro cost about zł.3.85 and a dollar zł.2.99. Investors sold Polish assets because of the higher probability of rate hikes in the US and the eurozone. Political worries over the budget deficit in 2007 also had a negative influence. 

Polish bonds and the złoty were under further pressure after the Finance Ministry surprised markets by raising its forecasts for price growth in the next months, and then the government announced it would raise its borrowing needs in 2007, raising debt supply on the domestic market. Finance Minister Stanisław Kluza declared that any additional expenditure in the budget is not possible.

According to MPC members Marian Noga and Halina Wasilewska-Trenkner, the central bank may have to raise interest rates early next year at the latest to quell inflation before it threatens the bank's 2.5-percent target. Rate hikes are more likely if the government raises its 2007 budget deficit beyond the initially set ceiling.

Marek Węgrzanowski

X-Trade Brokers Dom Maklerski SA