Why the forint is taking a hit and the zloty is rebounding

The major central banks all appear to be keeping policy rates at the same level for the time being. As a result, it has been remarkably quiet lately for the euro, dollar and pound. However, this does not apply to Eastern Europe, where the opposite exchange rate of the zloty and forint is striking.  

The board of the European Central Bank (ECB) will meet next Thursday to decide on the policy interest rate. In the past, financial markets sometimes held their breath in the run-up to these types of decisions. This time, however, it has been made clear well in advance that the policy interest rate will not be tinkered with. Just as it would be half a miracle if the US Federal Reserve decides to cut interest rates in two weeks' time. In Europe, the United States and the United Kingdom, policy rates have been stable since last summer. That immediately explains why things are so calm regarding the exchange rates of the most important currencies.

Currency fireworks!
Yet you don't have to look further than the east of the European continent for interest rate and exchange rate fireworks. For example, the Hungarian forint has fallen by 4% against the euro since mid-January. This slide has everything to do with the decision of the Hungarian central bank (Magyar Nemzeti Bank, MNB) to lower the policy interest rate from 10% to 9%. The MNB has plenty of room for this, as inflation has now fallen back within the bandwidth that the bank is aiming for. A gradual weakening of the labor market also indicates that a jump in inflation is not likely. The Hungarian central bank aims to reduce the official rate to 6% to 7% in June.

Slowly but certainly
If that target is achieved, the forint could fall even further. The Polish zloty is at the other end of the spectrum. The currency has risen slightly against the euro since the turn of the year. Over the past two years, the profit has amounted to more than 13%. This is only partly a consequence of the policy of the Polish central bank (Narodowy Bank Polski, NBP). Although it did increase the policy interest rate earlier and faster than the ECB from October 2021, the interest rate was again lowered somewhat in the autumn, followed by a new interest rate cut in November. Since then, however, the NBP – as a mirror image of the ECB – has kept the policy rate stable.

On the brink of a recession
Because the economy in Poland is growing significantly faster than that of the rest of the mainland, the zloty is slowly but surely continuing to appreciate. Poland's estimated economic growth of almost 3% is significantly higher than the pace in Western European countries. For example, the German economy is on the brink of a recession, while economic growth in the Netherlands amounted to only 0,1% during the fourth quarter. Tomorrow the Polish central bank will meet to discuss interest rates. If, like the ECB meeting a day later, there are no surprises, the falling forint and rising zloty could move even further apart.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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