Economists at Commerzbank have recently revised their EUR/PLN forecast path, albeit only slightly lower. They predict that the Euro will remain strong through 2023 but weaken once again during 2024. With the Zloty’s high-beta relationship to the Euro, they see the EUR/PLN rising towards 4.75 as inflation in Poland will likely remain stubbornly above target. While their base-case scenario is that inflation will moderate noticeably over the coming quarters, they do not expect it to fully converge to target. Consequently, 2024 is seen as a potentially Zloty-negative period.
The Euro has been on a general upward trend over the past few years, reaching an all-time high against the US Dollar in January 2021. This strength can be attributed to, among other factors, a weaker US Dollar, low interest rates in the Eurozone, and the European Central Bank’s (ECB) continuous quantitative easing program. The EUR/PLN, which is the currency pair representing the exchange rate between the Euro and the Polish Zloty, has been relatively stable, with the Euro gradually appreciating against the Zloty over time.
Inflation has been a concern for Poland, with the country experiencing stubbornly high inflation rates above the National Bank of Poland’s (NBP) target of 2.5%. In September 2021, Poland’s inflation rate reached 6.8%, significantly higher than the central bank’s target, prompting concerns over price stability and purchasing power. Despite the NBP’s efforts to address this issue, including increasing interest rates, inflation in Poland is expected to remain elevated over the foreseeable future.
The high-beta relationship between the Euro and the Zloty means that fluctuations in the Euro’s value have a disproportionate impact on the value of the Zloty. With the Euro expected to remain strong through 2023 before weakening in 2024, the EUR/PLN exchange rate will likely follow suit. A rising EUR/PLN exchange rate implies a stronger Euro relative to the Zloty, which may have implications for Poland’s economy.
Poland, as a member of the European Union but not the Eurozone, has benefited from strong trade relationships with other EU member states, thanks in part to the European single market. A stronger Euro relative to the Zloty could make Polish goods and services more competitive in the region, potentially boosting exports and supporting economic growth. Conversely, a weaker Zloty may make imports more expensive, contributing to inflationary pressures and potentially eroding purchasing power for Polish consumers.
As the Euro starts to weaken in 2024, the EUR/PLN exchange rate is anticipated to rise towards 4.75. This would signify a weaker Zloty in relation to the Euro, potentially creating challenges for Poland’s economy. A weak Zloty could exacerbate inflationary pressures by increasing import prices, while also making it more difficult for Polish businesses and consumers to access the European market.
It is important to note that several factors could influence the Euro’s strength and the EUR/PLN exchange rate, such as the evolution of the COVID-19 pandemic, changes in monetary policy, and geopolitical developments. While the Commerzbank economists’ forecast provides a baseline scenario for the Euro and the Zloty, potential changes in these factors could alter the trajectory of the currencies.
In summary, Commerzbank economists expect the Euro to remain strong through 2023 before weakening in 2024, leading to a rising EUR/PLN exchange rate. Poland is likely to face ongoing challenges with stubbornly high inflation rates, even as the central bank takes measures to address this issue. The high-beta relationship between the Euro and the Zloty implies potential risks for Poland’s economy, particularly as the Zloty is expected to weaken in relation to the Euro in 2024. As with any economic forecast, changes in global economic circumstances could influence the trajectory of these currencies and the impact on Poland’s economy.