Monex Europe: Polish election bears high consequences for the zloty

12 oktober 2023

The general election on Sunday October 15^th will bring a pivotal moment for the people of Poland, with both major parties offering very different visions for Poland’s future, notably on economic policy, civil rights, the rule of law and Poland’s relationship with the EU.

Current polling shows a close fought race between the incumbent Law and Justice Party (PiS) and the main opposition party, Civic Coalition (KO), with a number of smaller parties also likely to pick up seats. Given this, a clear winner looks unlikely, with one or more smaller parties ultimately likely to hold the balance of power in a coalition government. This means that the current loose fiscal policy stance is unlikely to change, and a return to the polls sooner rather than later appears likely.

The two major parties offer very different visions for the future of Poland

The more liberal KO is led by Donald Tusk, who previously served as Prime Minister between 2007 and 2014, before subsequently becoming President of the European Council. Given this, he is naturally seen as more pro-European. A government led by Tusk would find it far easier to unlock EU funds currently being withheld, as well as likely take a more orthodox approach to fiscal policy over the longer term in order to comply with EU fiscal rules. 

The governing PiS in contrast, hews more conservative with some populist tendencies. Whilst both the current Prime minister and President hail from this party, the real power lies with Party Leader and Deputy Prime Minister Jarosław Kaczyński. Under his leadership, actions to undermine the judiciary have put Poland at loggerheads with the EU that has led to the withholding of post Covid recovery funds.

However, several smaller parties are also likely to win seats in the Sejm and barring a significant upset will most probably hold the balance of power when it comes to forming the next government. Given this, it is very hard to predict who will ultimately take power, meaning that some political instability is likely and a second election in the near future is a significant risk.

The outcome of the election is likely highly consequential for the zloty

The election is likely to be consequential for the zloty in several key respects. First, whilst neither PiS or KO looks to be in a position to significantly tighten fiscal policy in the immediate future, the latter would likely take a more prudent approach over the medium term, which should help support the Polish currency over that time frame. Furthermore, a KO win would also likely unlock EU funds that are currently being withheld, providing a boost to the flagging Polish economy, which would in turn produce a nearer term boost for the zloty.

Most important for the immediate future though are the consequences of this election for the central bank. A number of MPC members are seen as closely aligned with the governing PiS party, a factor widely seen as the motivating for the recent surprise cut in policy rates, with the policymakers attempting to stimulate the economy in the election run-up. Given the perceived political motivation and lack of economic rationale, the move was poorly received by FX markets and led the zloty to sell off 4% against the euro, though this move has partially reversed.

A clear-cut victory either way should remove the pressure to continue cutting rates aggressively, but particularly so with a KO victory, and should see the zloty continue to recover as a result. However, a tight outcome with no clear majority could potentially see the zloty sell off further, with the NBP likely to remain excessively dovish on the prospect of another general election, whilst the political instability would also weigh on PLN.