In response to numerous questions concerning the eventuality that the Polish central bank might purchase Polish Treasury bonds in the secondary market, the National Bank of Poland hereby highlights the following circumstances:
Article 220 of the Constitution of the Republic of Poland stipulates as follows: “The Budget shall not provide for covering a budget deficit by way of contracting credit obligations to the State's central bank”. The Constitution does not expressly rule out the purchase of Treasury debt instruments by the central bank in the secondary market. The NBP’s tasks are detailed in Art. 3 of the Act on the NBP, which does not directly empower the Bank to engage in this type of operation.
Indirectly, a possible purchase of Treasury bonds by the central bank in the secondary market could be interpreted in terms of Art. 3 section 6a of the Act on the NBP, which stipulates that one of the NBP’s tasks involves “acting to sustain the stability of Poland’s financial system”. This means that the NBP might purchase Treasury bonds in the secondary market only exceptionally, in the case of a severe crisis threatening the stability of the domestic financial system.
Poland’s current macroeconomic and financial situation indicates that the stability of the financial system is not threatened by the situation in the public finance, which is confirmed by relatively low yields on Polish Treasury bonds and moderate CDS prices. Moreover, the results of stress tests for the Polish banking sector, published in the December “Financial Stability Report”, show that even a severe recession combined with considerable depreciation of the Polish zloty would not require recapitalization of Polish banks.
In the NBP’s opinion, financial markets may incorrectly assess suppositions about a decline in the prices of Polish bonds and the related potential need for central bank’s intervention. These might cause uncertainty resulting in higher volatility of bond prices and exchange rates.
Recent experience has shown that the NBP accurately assesses stability of the financial sector in Poland and, if necessary, applies appropriate instruments. In its “Monetary Policy Guidelines for 2012”, the Monetary Policy Council listed instruments which could be resorted to in the event of sudden and adverse changes in the financial markets. These focus on providing adequate liquidity, thus creating the framework for financial stability. Yet, the MPC made no mention of direct purchase of bonds in the secondary market.
According to the Act on the NBP, the basic objective of the activity of the NBP is to maintain price stability, and monetary policy should be coherent with this task. An independent central bank supports the Government’s economic policy, but may not substitute the Government in its functions, especially with respect to public debt management. The yields on Polish Treasury bonds are a reflection of financial markets’ assessment of the country’s economic situation, particularly, the condition of the public finance. In compliance with this statutory obligation, the NBP has already presented its assessment in this respect in the Opinion on the Draft 2012 Budget Act.