Polish Central Bank Intervenes to Weaken Zloty After Warnings

(Bloomberg) -- Poland’s central bank moved to weaken the zloty for the first time in a decade, delivering on a warning that it won’t tolerate a stronger currency as the economy tries to recover from the Covid-19 pandemic.

Sales by the bank Friday helped push the zloty down by as much as 1.7% against the euro in low-volume trading, according to two people with direct knowledge of the transactions. They asked not to be named because they’re not authorized to speak publicly.

The step, which the central bank didn’t confirm, comes after the zloty reached its strongest level in three months in early December, with markets ignoring warnings from the Monetary Policy Council that it should weaken to help ease the aftermath of the worst recession since the fall of communism.

MPC member Jerzy Zyzynski told the PAP news service that the intervention should probably be interpreted as a move to “encourage” the zloty to return to a level of about 4.5 per euro. He said the bank may act again if the currency starts to appreciate, and that the decision to step in wasn’t discussed within the MPC.

“This may be a warning shot that the NBP is monitoring the zloty and they don’t want it to gain too much,” said Piotr Matys, a currency strategist at Rabobank in London. “Perhaps they’re afraid domestic demand won’t be too strong and the burden will be on exports as the main engine of economic growth.”

‘Pandora’s Box’

For the last three months, the central bank’s statement after its policy meetings has said highlighted the “lack of a visible and more durable zloty exchange-rate adjustment to the global pandemic-driven shock” -- a factor it said that risks curbing the pace of recovery. The last time the bank intervened to weaken the zloty was in April 2010, when it traded at about 3.82 against the euro.

The currency hit a six-week low of 4.5179 per euro on Friday, paring that loss to trade at 4.4742 at 5:06 p.m. in Warsaw.

Poland’s move could prompt other developing markets to follow suit to perk up economies ravaged by the virus, according to Simon Quijano-Evans, chief economist at Gemcorp Capital LLP in London.

“If the NBP did buy FX today, it’s opened a Pandora’s box of emerging-market central bank policy actions” he said. “The very low growth and mixed inflation base effects from 2020 are going to make 2021 that much tougher for emerging-market central banks.”

©2020 Bloomberg L.P.