Announcement on the meeting of the NBP President with the Minister of Finance of the Republic of Poland
Pursuant to the constitutional rule of cooperation between the public powers, an expanded cooperation between the NBP and the Ministry of Finance – taking full account of the central bank independence – is key to ensuring a sustainable economic growth. Bearing in mind the above rule, the President of the NBP and the Minister of Finance hold cyclical discussions about essential issues related to the economic policy.
International determinants of economic policy
The global rise in commodity and food prices has, for the second time in the last three years, had a major impact on the global economic situation. A number of factors affect commodity prices: increased demand for commodities, particularly in China and India, expansive fiscal policies in leading world economies, inflexible supply in commodities and supply constraints observed in recent months arising from unfavourable weather conditions, natural disasters, political tensions and armed conflicts. In addition, some analysts also indicate that bubbles escalate the volatility of commodity prices.
The Polish economy is closely tied to the global economy. Therefore, the trends observed in global commodity markets are promptly reflected in the national market and make the conduct of a pro-growth economic policy more difficult.
Questionable proposals for counteracting the effects of increased inflation
Many solutions that are to limit the influence of higher inflation on household quality of life have been put forward in a public debate (e.g. cost of living allowance, cuts in excise duty on fuel). Such solutions were implemented in the past, both in Poland and other countries. The practice of economic life has shown, however, that they are inappropriate and are criticised by economists. Moreover, such recipes add to the risk of sustained inflation in the future and pose a risk to the stability of public finances as well as weaken the long-term economic growth rate. For example, the introduction of widespread cost of living allowance addressed to households would require finding additional funding sources which would translate into an increase in budget expenditure. Incurring these expenditures could result in exceeding the prudential threshold of the public debt to GDP ratio. This would lead to a situation where corrective measures, provided for in the act on public finances, would have to be taken, which would have a direct adverse impact on incomes, especially of the very poorest members of society. Therefore, it is the existing solutions entailed in social policy that should be used, corrected to the extent that assistance is provided to the neediest.
Cuts in excise duty on fuel, which is a solution used in the past that led to a significant reduction in budget income, will not result in the expected effects as it may lead to a decrease in wholesale prices while having a limited impact on retail prices. The right action is to enhance market competitiveness.
Budgetary and monetary policy to date
Pursuant to the commonly accepted practice, a close coordination of central bank monetary policy and government fiscal policy is the best response to a temporary acceleration of inflation triggered by rising food and commodity prices in international markets. A phased-out fiscal policy consolidation will allow reducing supply pressures and thus enable the conduct of an accommodative monetary policy. As a consequence of such measures, inflation triggered by an external impulse will gradually wane without any negative consequences for the potential economic growth rate and without hampering employment growth.
a) NBP’s monetary policy
According to the adopted assumptions, the purpose of the monetary policy is to maintain the inflation rate close to inflation target in medium term. Despite the present rise in consumer price index, core inflation, i.e. inflation rate excluding food and energy prices, stood at 2 percent y/y in March. The waning of the external price impulse will lead to an automatic return of the price index to the level close to inflation target. Under such circumstances, the monetary policy should prevent the strengthening of increased inflation caused by external inflationary shocks. The decisions to raise interest rates taken by the Monetary Policy Council in January and April created favourable conditions for containing inflation expectations and at the same time were a sign that the cycle of monetary policy tightening had started. The scale and pace of future rises in interest rates depends on the one hand, on the risk of increase in wage and inflationary pressures, and on the other hand, on the sustainability of economic recovery in Poland and the improvement in the labour market.
b) Government’s fiscal policy
The Government’s policy aims to eliminate the excessive public finance deficit by 2012. To this purpose, several measures have been taken. An expenditure rule to reduce the growth rate of government expenditure has been introduced. A reform of bridge pensions has been implemented. A decision was made to shift part of the pension fund contributions from Open Pension Funds to sub-accounts in the Social Insurance Company (ZUS). Implementation of rules limiting local government deficit is planned both through debt limits and linking the size of the deficit with income volume. VAT rates have been raised temporarily to 23% and 8% while at the same time VAT rates for certain basic food products have been cut. The possibility of deducting input VAT paid on the purchase of converted passenger cars registered as commercial vehicles has been limited and deducting input VAT paid on the fuel used in these cars has been suspended temporarily. The tax system has been tightened up by introducing the obligation, among others, for lawyers and physicians to have fiscal cash registers. It is expected that the combined effect of the above mentioned measures will amount to 4.4% of GDP in 2011-1012, which means Poland will be a leader in fiscal consolidation in Europe in this period. The details of these solutions and their impact on the general government balance have been presented in the draft Convergence Program – update 2011.
Collaboration between the National Bank of Poland and the Ministry of Finance
Optimal policy mix should ensure internal and external equilibrium while preserving high potential growth rate of the economy. With inflation rising, it is currently necessary to tighten budgetary policy. Bearing in mind the still uncertain investment revival in the Polish economy the optimal fiscal consolidation should be phased-out according to the Government’s plans. However, fiscal tightening will support monetary policy, particularly as regards counteracting the emergence of second-round effects. The government plan of budget deficit reduction will serve the purpose of anchoring inflation expectations and will support the return of inflation to inflation target as the impact of price shocks is waning. Curbing lending needs of the budget will contribute to the decrease in market risk premium and the strengthening of the zloty. A significant reduction in government expenditure growth rate should reduce inflationary pressures considerably in the medium term and thus allow to flexibly conduct monetary policy creating favourable conditions for private sector investments that enhance the potential growth rate of the economy in a sustainable way.
Today’s meeting has enabled both parties to assess the economic situation and share information about their respective plans aimed at enhancing the effectiveness of the macroeconomic policy. At the same time, attention was drawn to the possibility of increasing the effectiveness of over-supply sterilisation in the banking sector. The over-liquidity observed currently requires the execution of sterilisation operations that are becoming ever more frequent and costly, which was indicated by NBP representatives. It is also the source of a temporary but significant deviation of POLONIA interest rate from the reference rate. Over-liquidity of the banking sector is correlated with exchanging the funds Poland receives from the European Union directly at the NBP. The Minister of Finances shared this opinion and considered it appropriate to start regular sale of some of the EU funds on the spot market.