UBS raises zloty forecast as currency faces mounting pressure

UBS has upgraded its outlook for the EUR/PLN exchange rate, foreseeing the Polish zloty to weaken against the euro over the next 12 months. The Swiss bank anticipates the rate to plummet to 4.40 by the end of the year, 4.44 by March 2027, 4.48 by June 2027, and 4.50 by September 2027. This is a jump from the previous estimates of 4.32, 4.34, 4.36, and 4.40 respectively.

The zloty's depreciation is attributed to external challenges and mounting fiscal risks in the Eurozone, as highlighted by UBS analysts Pietro Santin and Tilmann Kolb. The widening disparity between the National Bank of Poland's policy stance and the European Central Bank’s rate hikes are major factors undermining the zloty's value.

While the ECB has already lifted rates twice this year to 2.50%, the NBP has kept its policy rate at 3.75%. The recent reinstatement of fuel subsidies by the Polish government is forecasted to exacerbate this gap, as it may curb headline inflation and alleviate the pressure on the NBP to hike rates. UBS underscores the increased scrutiny on Poland's fiscal risks, particularly in the run-up to the parliamentary election next year, which could further dent the zloty's appeal.

Market expectations for Poland's fiscal deficit are projected to be 7.1% of GDP in 2026, according to Bloomberg consensus. The external environment also plays a crucial role, with European gas prices nearing an all-time high of €100 per megawatt-hour, a stark contrast to recent levels. France's fiscal woes have further soured risk sentiment towards European assets.

Polish inflation rose to 4.1% year-over-year in September, up from 3.4% in August, driven by surging fuel prices. Bloomberg consensus forecasts a deceleration in Polish growth from 3.5% in 2023 to 3% in 2027.