Polish Central Bank Would Welcome Stronger Zloty

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A stronger zloty would amplify the impact of Polish interest-rate increases, central bank Governor Adam Glapinski said, pledging to do whatever it takes to drive down spiraling inflation.

“Today, the appreciation of the exchange rate would support monetary tightening and would be consistent with the direction of the central bank's actions,” he said in response to questions from Bloomberg News. “We want to bring down inflation in a sustainable way.”

The zloty extended gains after the governor's comments, trading 0.4% stronger against the euro, the best daily performance among the world's 31 major currencies.

Glapinski turned into an advocate of a strong zloty late last year, changing course from the end of the 2020, when the central bank intervened against the currency.

“Today, the situation in the economy is different,” he said. “We have rebuilt after the pandemic, economic growth is high, inflation is clearly elevated, and we're raising interest rates.”

While its regional peers, Hungary's forint and the Czech koruna, strengthened against the euro this year on the back of monetary tightening, the zloty has missed the rally.

Glapinski said signals of monetary tightening in the U.S. and geopolitical tensions between Russia and Ukraine are affecting the Polish exchange rate. Citigroup Inc. and Societe General SA recently singled out the zloty as the most vulnerable in Eastern European to a potential flare-up in the standoff.

Important Channel

Glapinski's attempt to talk up the Polish currency echoes comments from Prime Minister Mateusz Morawiecki, who said last month that the government is trying to strengthen the zloty and hoped it would gain more to curb inflation.

The central bank has come under fire for allowing inflation to surge to the highest in more two decades. It only began raising rates in October and is widely expected to lift borrowing costs for the fifth straight month at its next meeting on Feb. 8.

Meanwhile, the government has scrambled to cut levies -- from food to heating and gasoline -- in order to lower price increases for the consumers. Inflation reached 8.6% in December and could be around 10% for most of 2022.

Glapinski said that while inflation was mainly the effect of external shocks, the central bank needs to act to prevent it from becoming entrenched as the labor market is strong and the economy probably expanded at around 7% in the fourth quarter of 2021.

“As for the zloty exchange rate, it is an important channel of influence on the economy,” he said.