Forex & money markets

A SUPPLEMENT TO EUROMONEY

Devaluation and the basket

Like virtually all of the currencies of the so-called transition economies, Poland started its re-entry into the world's free market community with a massive devaluation. In order to regain competitiveness, the Polish Zloty was then pegged to a currency basket reflecting the weight of the country's most important trading partners and foreign investors.

Due to the large inflation differentials between Poland and the countries whose currencies constitute the basket, since December 1991 the Central Bank has furthermore followed a crawling peg policy of gradual monthly devaluation. The regular devaluation factor is administered to shadow consumer price index development and has therefore been lowered in irregular intervals. From 1.8% per month in 1991, this rate has been 1% per month throughout 1996 and although the market has been expecting a further reduction to about 0.9% ­ 0.8% per month in 1997, the Central Bank governor has recently ruled out such a step until domestic inflation has reached a level of 13% on a year-on-year basis.

Currency basket composition of the zloty

Source: National Bank of Poland

Monthly devaluation factor development

Source: Rzeczpospolita

Parity and the daily fixing

Poland's guardian of currency stability over the last years has been the Narodowy Bank Polski (National Bank of Poland ­ NBP), the country's central bank, whose independence and monetary policy have been modelled on the German Bundesbank.