What is behind the power of the krone and the zloty?

The Czech Republic and Poland were attractive destinations for budget travellers a few years ago. These tourists will soon have to look for another destination. It seems that the krona and zloty will resume their advance after a short break.

The reverberation of 'Liberation Day' is still reverberating strongly in many emerging world currencies. The economies of many of these countries are sensitive to fluctuations in global trade. In addition, in uncertain economic times, investors prefer to opt for currencies that are known as safe havens, such as the Swiss franc and Japanese yen. The currencies of Eastern European countries, however, are escaping this fate. The Czech crown took a hit when US President Donald Trump announced a series of levies on 2 April. But since then, the exchange rate has rebounded rapidly. Against the euro, the crown is now higher than it was at the end of 2024. It is possible that this rise will be further extended in the coming months.

Kroon will soon have the interest rate wind in his back again
The Czech Republic is heading for economic growth of almost 2,5% in the current year. This pace is in stark contrast to the average growth of 0,9% in the eurozone. It is mainly thanks to this growth advantage that the krone has held up well in recent months. Thanks to falling inflation, the Czech central bank (CNB) has been able to reduce the policy rate in nine steps from 2023% to 7% since the end of 3,75. As a result, the interest rate differential with the eurozone has shrunk considerably. It now appears that the CNB is marking time for the time being, as inflation is fluctuating between 2,5% and 3%. In the meantime, the European Central Bank is well on its way to more interest rate cuts in an attempt to stoke the fire under the European economy.

Liberation Day barely affects Poland
In neighbouring Poland, the door seems to be ajar for a new interest rate cut. In the autumn of 2023, the Polish central bank (NBP) already lowered the policy rate in two steps from 6,75% to 5,75%, only to pause for a year and a half. As a result, the interest rate differential with the falling European interest rate has increased considerably. The zloty also has the wind in its sails of strong economic growth in Poland. This is expected to increase from 2,9% to 3,2% this year. The good pace is mainly due to growing domestic demand. Trump's import duties will hardly affect the country, as only 6% of total exports find their way to the United States.

Journey to the East
Despite strong economic growth, inflation actually seems to be cooling down somewhat. Due to the combination of the switch to a new inflation basket by the NBP and falling energy and food prices, inflation in Poland will return to the bandwidth that the central bank is aiming for this year. Initially, this did not seem to happen until the end of 2025. Lower inflation makes it tempting to give the economy an extra boost by lowering the policy rate. This prospect is an important reason why the zloty has not risen further since the turn of the year. But anyone who is hesitating about a holiday in Eastern Europe would be better off booking this summer than next year. The well-performing economies of the Czech Republic and Poland - in combination with the ECB's interest rate cuts - are making a trip to the East increasingly expensive.

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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