The basic objective of monetary policy is maintaining price stability. Stable prices are an indispensable element of constructing solid foundations for long-term economic growth.
Since 1999 the direct inflation target strategy has been utilised in the implementation of monetary policy. Within the framework of this strategy, the Monetary Policy Council defines the inflation target and then adjusts the NBP basic interest rates in order to maximise the probability of achieving the target. Since the beginning of 2004, the National Bank of Poland has pursued a continuous inflation target at the level of 2.5% with a permissible fluctuation band of +/- 1 percentage point. The NBP maintains interest rates at a level consistent with the adopted inflation target by influencing the level of nominal short-term interest rates on the money market. Money market rates affect loan and deposit rates at commercial banks and thus the size of loans, the demand within the economy and the inflation rate. The set of monetary policy instruments used by the NBP enables it to determine interest rates on the market.
These instruments include open market operations, reserve requirements and credit-deposit operations.
Open market operations
Open market operations are transactions in which the central bank engages with commercial banks on its own initiative. Such transactions include the conditional and outright sale or purchase of securities or foreign currency, as well as the issue of own-debt securities by the central bank.
Open market operations balance the demand and supply of funds held by commercial banks at the central bank. This allows the central bank to influence the level of short-term interest rates on the interbank market.
The open market operations currently conducted by the National Bank of Poland consist in the issue of own-debt securities (7-day NBP money market bills), whose minimum yield equals the reference rate adopted by the Monetary Policy Council.
The central bank imposes on the banks the obligation of maintaining required reserves. The purpose of these reserves is to smooth out the impact of movements in banking sector liquidity on interbank interest rates. They also serve to limit excess bank liquidity.
The required reserve constitutes a portion, expressed in zloty, of funds accumulated on bank accounts and obtained from the sale of securities and other repayable funds accepted by the banks, except for funds taken from another domestic bank, or obtained from abroad for a period of not less than two years. The required reserve is held on accounts with the NBP.
Reserve requirements are set by the Monetary Policy Council. From December 31, 2010 the required reserve rate is 3.5% for all the types of deposits, except for funds obtained from repurchase agreements, whose required reserve rate is 0%. Since September 30, 2003 all banks have been reducing their calculated required reserves by an equivalent of 500,000 euro. From May 1, 2004, required reserve funds carry interest.
When the NBP engages in basic open market transactions with a 7-day maturity period, the shortest (especially overnight) interbank market rates may be subject to considerable fluctuations. Credit-deposit operations, which are conducted with commercial banks on their initiative, serve to limit such fluctuations; these include the lombard loan and the banks' time deposits at the NBP (overnight deposits). NBP credit-deposit operations affect the level of interest rates on the money market; the lombard rate is the ceiling here and the NBP deposit rate is the floor.
The NBP offers lombard loans against Treasury securities to the banks. Such loans enable banks to cover short-term liquidity shortfalls. It is granted according to the following rules:
- collateral consists of Treasury securities and the amount of loan may not exceed 80% of their nominal value,
- loan matures on the next business day after the date of it being granted,
- loan is granted upon repayment of a loan granted previously.
The National Bank of Poland also offers banks the possibility of making short-term (overnight) deposits with the central bank. The deposits are accepted until the end of the business day and the deposit amount together with interest due is returned on the following business day. The deposits carry a variable interest rate (deposit rate) set by the Monetary Policy Council.
Time deposits at the NBP allow commercial banks to manage their liquid funds surpluses, preventing short-term interbank market interest rates from falling below the deposit rate.
Exchange rate policy principles
Since April 12, 2000 the zloty exchange rate has been a floating exchange rate that is not subject to any restrictions. The central bank does not aim to set predetermined zloty exchange rates against other currencies. It reserves, however, the right to intervene if it deems this necessary in order to achieve the inflation target.
On its accession to the European Union, Poland undertook to join the euro zone. Thus in the future the zloty will be replaced with the common European currency, and monetary policy will be shaped by the European Central Bank.
Meeting the exchange rate stability criterion is one of the conditions of joining the euro zone. Therefore before the adoption of the euro, the zloty exchange rate against the euro remains fixed for at least two years within the ERM II (Exchange Rate Mechanism II). This means that during this period the National Bank of Poland will maintain the market zloty exchange rate against the euro within the permissible range, with regard to the set central parity.