22:42 15 November 2021
The zloty should be strengthening but it is weakening
During the previous week, our currency lost about 2 percent against the dollar, 1.2 percent against the Swiss franc, and 1 percent against the euro. But theoretically, the zloty should strengthen. Why? The latest data from the economy increase the likelihood of interest rate hikes by the Monetary Policy Council. On Friday, the GUS published the GDP reading in Q3, which economists interpreted as an argument for further monetary policy tightening.
But in the case of the zloty, it does not work. Despite two increases announced by the MPC, which have already translated into changes in bond yields, the zloty remains weak. And that's the problem.
First, the fight against inflation, which the central bank finally decided, will be more difficult. Because the so-called exchange rate channel does not work – as the zloty weakens, imported goods will continue to rise. Including commodities that pushed inflation to levels not recorded for 20 years.
Second, the depreciation of the currency at the time of monetary policy tightening may not be the best proof of the credibility of our monetary authorities. It is as if the market did not believe that the MPC and the NBP are determined enough to suppress inflation.
