King of the money market
Early in 2004, the złoty's value was mainly influenced by political events. Its initial slump was caused by investor anxiety that an essential fiscal reform program would not find support in parliament. The markets watched for any signals that the Economy Minister, Jerzy Hausner, the author of the reform package, was ready to leave the government. Prominent members of SLD left and the growing popularity of the Self-Defence Party undermined investor confidence. It seemed the ship was sinking.
Belka the lifebelt
Then, in May 2004, Poland joined the European Union. Marek Belka, well known to the financial markets thanks to his previous role as Finance Minister, was appointed as the new PM. He struggled to win a vote of confidence and was successful. Investors were pleased but had to hold their nerve until the autumn and another vote of confidence for the government.
After the historical accession in May, investors turned their attention to macro figures and focused on the fundamentals. The economy was growing sharply and so were prices.
The central bank underestimated the pace of inflation (at 4.6 percent, it was well above the bank's safety range of 1.5 to 3.5 percent) and it was forced to act briefly. Unfortunately for investors, these actions were often surprising and caused a lot of turbulence on the market. Three times in a row the MPC raised interest rates, altogether by 1.25 percent, and each time it was not in line with market expectations. Nevertheless, the złoty continued its upward trend.
Export blues
The currency's strong upward path was not in line with exporters' expectations. Many voiced concern over the negative influence the strong currency was having on exporters' profitability. However, the central bank played down speculation over intervention.
It seems that the złoty's rapid rally has come to an end. Market participants should take a closer look at next year's parliamentary elections. Civil Platform is likely to win, but it is unlikely to have a majority. That would mean a soft economic program that would probably be diluted by potential coalition partners, Law and Justice. Investors would surely not appreciate that.
What about inflation and interest rates? Economists say that prices are likely to fall in the mid-term (2005-2006). Investors expect the central bank to change its restrictive bias and start cutting the cost of money in six to nine months.
With the impending adoption of the euro, investors' confidence should stabilize and we should also not forget about net capital inflows from EU.
Krzysztof Rup, Warsaw Investment Group (WGI)
Belka the lifebelt
Then, in May 2004, Poland joined the European Union. Marek Belka, well known to the financial markets thanks to his previous role as Finance Minister, was appointed as the new PM. He struggled to win a vote of confidence and was successful. Investors were pleased but had to hold their nerve until the autumn and another vote of confidence for the government.
After the historical accession in May, investors turned their attention to macro figures and focused on the fundamentals. The economy was growing sharply and so were prices.
The central bank underestimated the pace of inflation (at 4.6 percent, it was well above the bank's safety range of 1.5 to 3.5 percent) and it was forced to act briefly. Unfortunately for investors, these actions were often surprising and caused a lot of turbulence on the market. Three times in a row the MPC raised interest rates, altogether by 1.25 percent, and each time it was not in line with market expectations. Nevertheless, the złoty continued its upward trend.
Export blues
The currency's strong upward path was not in line with exporters' expectations. Many voiced concern over the negative influence the strong currency was having on exporters' profitability. However, the central bank played down speculation over intervention.
It seems that the złoty's rapid rally has come to an end. Market participants should take a closer look at next year's parliamentary elections. Civil Platform is likely to win, but it is unlikely to have a majority. That would mean a soft economic program that would probably be diluted by potential coalition partners, Law and Justice. Investors would surely not appreciate that.
What about inflation and interest rates? Economists say that prices are likely to fall in the mid-term (2005-2006). Investors expect the central bank to change its restrictive bias and start cutting the cost of money in six to nine months.
With the impending adoption of the euro, investors' confidence should stabilize and we should also not forget about net capital inflows from EU.
Krzysztof Rup, Warsaw Investment Group (WGI)
