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Weak zloty a cause for concern, but shouldn’t justify rate hikes

The recent sell-off in the zloty will make it harder for the Polish government to keep public debt from breaching constitutionally mandated ceilings. In the extreme, policymakers face the risk of entering a self-defeating cycle of austerity, even weaker growth and fiscal slippage. But in reality, we suspect that limited FX intervention should be sufficient to avoid this outcome.

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