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The Polish zloty has fallen nearly 3% against the euro since the National Bank of Poland’s shock decision to cut interest rates on Wednesday, underscoring the delicate balance central bankers face as they try to boost economic growth amid stubbornly high inflation. Behavior.

Polish rate setters this week cut borrowing costs by 0.75 percentage points to 6%, three times the cut analysts expected, although inflation remains high at 10.1%.

A weak currency could increase inflation by raising import prices and stimulating export demand.

Adam Glapiński, the governor of Poland’s central bank, said the decision was based on a “completely changed” economic outlook, with the prospect of a recession in Germany being particularly worrisome for Polish exports. He added that he expects inflation to fall to just over 8.5% in September and continue to decline as the economy weakens.

“Poland is connected by an umbilical cord to Germany, which is in a kind of stagflation,” said Gustavo Medeiros, research director at Ashmore Group.

Data this week showed that Germany’s economy has been deteriorating rapidly, with industrial production falling 0.8% in July, a larger-than-expected decline. Germany’s core inflation rate, which strips out volatile food and energy prices, has remained above 5% since October.

“Poland is trying to be more proactive and get ahead of what they think is going to be a broader slowdown in growth,” said Aaron Grehan, head of hard currency emerging market debt at Aviva Investors.

Zloty/euro line chart shows Polish zloty plummets after shock rate decision

The move comes at a critical time for the European Central Bank, which is considering whether to raise interest rates as it walks a tightrope as it tries to curb rising prices while avoiding deepening the recession.

The zloty’s fall could be a warning to other central banks as they begin to cut interest rates.

“This is an extreme move,” said Salman Ahmed, global head of macro at Fidelity International. “The signal they are sending to the market is that they will tolerate inflation.”

Some economists believe Poland’s central bank is unduly influenced by the goals of the ruling Law and Justice party, which faces parliamentary elections next month.

The currencies of neighboring Czech Republic and Hungary also fell on Poland’s interest rate decision. However, the move was more modest as analysts said these countries were unlikely to deliver a monetary policy shock.

The Czech National Bank has kept interest rates at 7% since June last year and is expected to do so again at this month’s meeting. Headline inflation fell back to 8.8% in July.

The National Bank of Hungary has gradually lowered interest rates from 18% to 14% since May as inflation has fallen from a peak of more than 25% earlier this year to 16.4% in August.

The strength of the zloty is seen as helping to reduce imported inflation ahead of Poland’s rate decision. Grehan said the central bank was unlikely to tolerate a rapid devaluation of the yuan, but added that Poland had large foreign exchange reserves should it decide to intervene to support the currency.


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