NBP Governor interviewed by the Hungarian business daily Világgazdaság
Central Europe’s biggest central banks have all started to increase interest rates recently. Is this a race now, or are common reasons and considerations in play? What are the differences that could cause differences in the pace of monetary tightening?
In the recent period one can indeed see a change in the monetary policy stance of the central banks of Central and Eastern Europe. I would say even more: such a change can also be seen on a global scale, although in the case of the major central banks it is much more subtle than in the case of many of the smaller central banks, including those in our region. The action taken by the monetary authorities should not surprise us if we take into account the significant rise in global inflation observed recently. I will mention only that in the United States price growth has exceeded 5% for some time, and in Germany it exceeded 4% in September. These are levels that haven’t been seen for many years. This elevated inflation is due to a combination of several shocks of a global nature. Above all, it is the rapid growth in global prices of energy commodities and – in the recent period – also of agricultural commodities. In addition, global prices are boosted by disruptions in global supply chains and markedly higher international transport costs than in previous years. And in Europe, rising prices of CO2 emission allowances as a result of the EU’s climate policy are also boosting inflation. Of course, the economies of Central and Eastern Europe are not immune to the effects of such shocks and price growth is also elevated in our region. What’s more, recently we have seen more and more signals suggesting that faster price growth will unfortunately persist longer than previously expected. As a result, there is a risk of inflation persisting at an elevated level, particularly in countries where we observe a marked increase in economic activity. It should come as no surprise that the central banks of Central and Eastern Europe operating in similar conditions have taken similar measures. Of course, they are similar, but not the same, since the decisions of the central banks – both up to now and in the future – depend on their assessment of the current economic climate and inflation as well as the outlook in the individual economies. Differences in these assessments translate into differences in timing the start of monetary policy tightening, its scale and its pace.
Why was it Poland that was the last to raise interest rates in the region? What are the odds, in your view, of NBP increasing interest rates further? If further interest rate hikes are to come, do you prefer the National Bank of Hungary’s way of hiking rates each month to an (undefined) equilibrium rate, or any other method?
Decisions on interest rate hikes in individual economies of our region are taken on the basis of an assessment of the current situation and outlook. It is true that our economies have been affected to a large extent by the same global shocks. However, at the same time we differed in our assessments of the risks for the economic recovery and the durability of the impact of the global shocks on inflation. In view of the uncertainty about the impact of the autumn wave of the pandemic on the economic situation, we judged that a little more caution in our actions was justified. Yet, when this uncertainty declined and at the same time the risk of inflation persisting at an elevated level appeared, we took decisive action. These are not the only differences – our economies differ in many structural features, also the so-called reaction function of our central banks is clearly somewhat different.
However, let us remember that taking into account the lag in the transmission of interest rates, these few months’ difference between the decisions of the Czech and Hungarian central banks to reduce monetary accommodation and our response will not make a big difference to price processes in the medium term. We can see clearly that inflation trends in individual countries of the region remain similar, so the moment of the first interest rate hike does not matter so much here.
As far as our future decisions are concerned, as always we will base them on the incoming data and information, their assessment and the subsequent formulation of forecasts. This is why we do not make any declarations in this area. The only thing I can assure you is that NBP will not allow inflation to persist at an elevated level.
About inflation: it has become a debate with no conclusion so far in Europe (or in the USA) as to whether the ongoing rise in inflation is caused by temporary factors or whether it has elements that can persist in the longer term. What is your take? Will inflation retreat into NBP’s target range any time soon? Or do you see risks? Are there any factors that you want to see clearer? Are you worried about the surge in producer prices, and can that feed into the consumer price index?
The debate about how long elevated inflation will persist has been going on for several months. Just the fact that this discussion is prolonged shows that the subject is not trivial. Initially we judged that some of the factors boosting price growth in Poland were of a temporary nature and would fade next year, translating into a decline in inflation. However, along with September’s sharp rise in energy and agricultural commodity prices and reports of prolonged disruptions in the global supply chains, the likelihood increased that inflation would be even higher and that it would persist at an elevated level longer than we previously expected. This, in turn, creates the risk of the persistence of higher price growth in the medium term, in particular in view of the rapid growth in economic activity expected in the coming quarters and the favourable situation of employees in the Polish labour market. In such conditions, on the one hand, enterprises will have greater possibilities to increase the prices of their products in the wake of rising costs, and on the other hand, employees will demand wage rises. In order to reduce the risk that inflation will also remain elevated in the medium term, NBP raised interest rates in October and November, including raising the reference rate to 1.25%. This basically means the withdrawal of accommodative monetary policy introduced in response to the crisis. Further decisions will depend on the future assessment of the situation and the inflation outlook.
Those two countries in the region where central bank interest rate tightening arrived the latest have the worst-performing currencies this year (inflation also seems to be the highest in Romania and Poland). Do you think there is a connection? Is there anything for you to correct or to catch up with?
I think we shouldn’t interpret fluctuations in exchange rates through the prism of one macroeconomic indicator or a selected parameter of economic policy. Besides, such comparisons can give different results depending on what reference period we choose. Of course, higher interest rates can lead – ceteris paribus – to the appreciation of the national currency. But firstly, the condition ceteris paribus is very rarely met, and secondly, demand for a currency is decided not only by short-term capital inflows, but also by the attractiveness of the given economy to investors with a long-term investment horizon. However, in this context there are no doubts that the actions of NBP are favourable for the Polish zloty. This is because NBP conducts monetary policy in such a way that it ensures price stability in the medium term, at the same time supporting growth in activity in the Polish economy. Thus NBP contributes to the creation of attractive and stable conditions for the realisation of medium- and long-term investment projects.
Hungary’s forint got under pressure because some market participants believed faster rate increases are justified. Do you expect similar pressure on the zloty? What weight do you attribute to the zloty exchange rate in your interest rate decisions? Is it important in monetary transmission? Is the current zloty exchange rate following the NBP rate hike satisfactory, or do you think a higher or lower level would reflect the state of the economy better?
So far no such pressure has been observed on the zloty. The decisions of the Monetary Policy Council of October and November were decisive and aimed at reducing the risk of inflation persisting at an elevated level. Market analysts of course attempt to anticipate our decisions. Sometimes they succeed, sometimes they don’t. But it is difficult to assume that it is market expectations, and not the decisions of the central bank, that reflect the suitable scale of adjustment of interest rates.
As far as the exchange rate is concerned, I will not comment on its development in recent months. I will only repeat that its current level supports growth in economic activity. At the same time, in the current conditions I would not overestimate the significance of the exchange rate channel for the transmission of our decisions: in view of the strong negative external shocks, even a marked appreciation of the exchange rate would not lead to a significant fall in current inflation. However, it would be painful for exporters and therefore unfavourable for the economy.
Are central bankers in the region watching each other’s hands? Do you see a chance that the Fed or ECB action (or inaction) could lead you to doing (or not doing) something? Many market participants expected tighter Fed policy to start in early November (or in December): if that happens, would that be a factor increasing the chance of further NBP tightening?
We observe the actions of the Fed and ECB carefully because they are obviously important in terms of influence on the determinants of monetary policy in Poland. Today, despite elevated inflation, these central banks are still conducting expansionary monetary policy: they are keeping interest rates at a low level and purchasing securities on a very large scale. Indeed, recently the Fed took the decision to begin reducing the scale of its asset purchases, or the so-called tapering. However, this was neither a surprising move, nor a step that significantly changes the determinants of monetary policy in Poland. Of course, the policies of global central banks are of great significance for the economic outlook of our trading partners and in this way they also impact the outlook for the Polish economy. Therefore, although only indirectly, they also have an impact on our decisions. However, there is no question of maintaining a predetermined disparity of interest rates, and even less so of copying the ECB’s monetary policy (shadowing the ECB). All the more so, there can be no question of this in relation to the monetary policy conducted by other central banks in our region. Each of our central banks knows best the conditions of its economy and takes independent decisions guided by its best understanding of the way to meet its inflation targets.
The last question is about politics, if you have anything to say about that. Can the political attacks within the EU against Poland and Hungary become a factor in monetary policy decisions (for example, via their effect on FX rates or yields on Treasury securities)?
I will answer briefly: the central bank in Poland has an established tradition of independence from political factors – both domestic and foreign. And nothing has changed in this matter. NBP will continue to conduct monetary policy in such a way – taking into account the current and forecast macroeconomic situation – as to ensure the stability of the Polish zloty.