NBP Governor for “Gazeta Bankowa”
NBP Governor for “Gazeta Bankowa”
“Just as we were determined to protect the Polish economy during the pandemic, we will not let higher inflation gain a foothold,” says Prof. Adam Glapiński, NBP Governor, in his interview for “Gazeta Bankowa”.
The “Gazeta Bankowa” monthly has published an interview with Prof. Adam Glapiński, NBP Governor, entitled We will not let higher inflation gain a foothold.
“In 2020 we faced an unprecedented shock to the economy – both at home and abroad – caused by the outbreak of the pandemic. At that time, NBP took many decisive, swift measures in order to mitigate the economic effects of COVID-19 to the greatest extent possible, i.e. in the first place to protect jobs, prevent bankruptcies of companies, and maintain the stability of the financial system. The government’s anti-crisis programmes directed at enterprises and households, whose launch was supported by the activities of NBP, had similar goals. As a result, Poland handled the crisis very well. The recession in our country was relatively shallow and short-lived, and unemployment hardly increased at all, making it among the lowest in the European Union. Consequently, it was possible to quickly make up for the pandemic losses, and our GDP already exceeded the pre-pandemic levels in the second quarter of this year, which is something many European countries haven’t yet managed to achieve. Overall, we have been able to protect the incomes of Poles and Polish companies, paving the way for the continuation of Poland’s economic development in the coming years. In this way, we also supported the stability of the financial system.”
“[…] inflation has increased in most countries, including the world’s wealthiest ones such as the United States and Germany, reaching the highest levels in several decades. […] we took decisive measures in order to reduce inflation. We have already raised interest rates twice and we will pursue further action if necessary. Just as we were determined to protect the Polish economy during the pandemic, we will not let higher inflation gain a foothold. Of course, we will do this while also ensuring sustainable growth in the economy. We should keep in mind that inflation will remain elevated until the first quarter of 2022, because – as I’ve said – it is currently being boosted by increases in the global prices of fuels and commodities, a spike in gas prices in Europe, the effects of the EU climate policy influencing electricity prices, and by various other factors. However, our actions will prevent these shocks from increasing inflation permanently. As a result, after several quarters inflation will start to decline.”
“When it comes to private investment, NBP follows it closely as part of the ongoing monitoring of the enterprise sector. We are seeing a clear rebound in corporate investment after the pandemic. In the third quarter of this year, the general index of investment optimism among the surveyed companies increased for the fifth quarter in a row and is now close to the levels recorded during the peak of the last investment cycle in 2018. According to the latest NBP projection, the value of enterprises’ gross expenditure on fixed assets will exceed the levels recorded before the outbreak of the pandemic as early as the beginning of 2022.”
“The planned transfer of the contribution from NBP’s profits to the Armed Forces Support Fund is, in my opinion, the right decision and I’m very happy about it. The central bank’s profit is the income obtained mainly from the management of the NBP reserves, which are classified as national assets. Meanwhile, national defence is one of the most essential functions of the state. […] this will require statutory amendments […]. Such an amendment – if adopted – will not affect the principles relating to the generation of this profit. Just as before, NBP will strive to effectively manage its reserves and costs, which should enable the maximization of the financial result.”
“[…] Poland’s security is the basic condition for economic stability and prosperity.”
“A shift towards nuclear power is inevitable and necessary. Poland can afford to finance the construction of nuclear power plants, and NBP is ready to indirectly support such activities, of course, within the confines of the instruments at our disposal. In the long term, this is also consistent with the mandate of the central bank, i.e. with the goal of maintaining medium-term price stability, because limiting energy price increases will be conducive to lower inflation.”
“[…] the European Union’s climate policy is a burden on the competitiveness of European industry, in particular on the international stage. On the other hand, from the perspective of the central bank, one additional important consequence of that policy is its impact on inflation. The proposed changes mean that in many years to come, these carbon footprint taxes will be driving up prices, which from our point of view will constitute a long-term negative supply shock. Any actions taken in the coming years should be well-considered so as not to overburden the economy and the people with the costs of the energy transformation.”
Prezes NBP dla „Gazety Bankowej”
Interview with Professor A. Glapiński, Governor of NBP for Interia.pl
Interview with Professor A. Glapiński, Governor of NBP for Interia.pl
PROFESSOR ADAM GLAPIŃSKI, GOVERNOR OF NARODOWY BANK POLSKI: WE ARE NOT FOLLOWING THE PATH TAKEN BY TURKEY
“The increase in NBP interest rates in recent months along with the fact that market participants are already assuming a scenario of continued interest rate increases in their analyses and valuations should be beneficial for the Polish złoty,” says Professor Adam Glapiński, the Governor of Narodowy Bank Polski and the chairman of the Monetary Policy Council, in an interview for the web portal Interia. “Comparisons between the economic situation of Poland and the situation in Turkey are completely unjustified. These are two entirely different worlds,” he adds.
Paweł Czuryło, Interia: At what point in time, at what level of inflation, will we be able to tell that monetary policy has already been tightened enough? And how far do you think we are from that point? Would you allow for a scenario in which the NBP reference rate reaches 3 per cent (compared to the current rate of 1.25 per cent)? And how would you respond to all those pointing out the highly negative real interest rates in Poland compared to other countries, including the countries of our region?
Professor Adam Glapiński, Governor of Narodowy Bank Polski: Monetary policy affects price dynamics with a certain lag. The recent interest rate hikes will not reduce inflation immediately, but they are supposed to reduce the risk that such elevated price growth becomes entrenched amid Poland’s favourable economic situation. Therefore, the key factor in our decisions is the assessment of the inflation path over the next few quarters. As for the scale of the tightening, it will be appropriate for inflation to return to the target within the horizon of our policy. As to the level of interest rates at which this will happen – we will see. We will be assessing the inflation outlook along with the incoming data and forecasts.
In your opinion, when could the cycle of rate hikes in Poland end? Are you in favour of larger but less frequent moves or more frequent but smaller increases?
As I’ve said many times before, it is risky to formulate assessments on future interest rate changes, because they are sometimes interpreted as declarations concerning the Council’s future decisions. Meanwhile, these decisions will only be made on the basis of information that is not available today. In short, everything will depend on the incoming data and forecasts.
Do you still believe that the highest inflation rate will be recorded in January, and that it will reach the level of 7 per cent? Or perhaps NBP’s forecasts from the last projection are already outdated and overly optimistic? In an interview with Interia Professor Eugeniusz Gatnar spoke of a 9 per cent inflation rate in early 2022.
Each forecast is prepared on the basis of the information resources available at the given time which influence the assumptions being made. At present, expectations with regard to the inflation path in the short term are primarily affected by assumptions concerning the trends in commodity and energy prices. According to the central path of the last projection, the CPI consumer price index was supposed to increase to 7.0 per cent on average in the first quarter of 2022. We should keep in mind, however, that the projection also indicates the risk of different paths of CPI inflation, as illustrated by the fan chart. Therefore, it cannot be ruled out that inflation will deviate from the central path of the projection, especially in conditions of such marked changes in commodity prices as we are currently experiencing. What’s more important, however, is that in the longer term, inflation will decline, due to the increases in the NBP interest rates.
Is it worth sacrificing some economic growth in the short term in order to achieve low inflation in the long term, through interest rate hikes, and to help the economy in that way? Also in the context of the elevated inflation perceptions indicated by respondents in various opinion polls.
It should be noted that the increased level of inflation in Poland, just like in other economies, is still mainly the result of supply-side factors. Monetary policy cannot directly influence the supply side of the economy, but it does affect aggregate demand. In other words, an interest rate increase is usually associated with a certain cooling of demand, which, however, is necessary in order to prevent high inflation from becoming entrenched.
Is Poland closer to the United States in terms of its inflationary situation, as you have suggested until recently, or is it closer to the region, for which the economists at the ING bank foresee target interest rate levels around 3 per cent (Hungary, Czechia, Romania)?
One thing that undoubtedly unites most economies in the world today, and therefore, also unites the various central banks, is the highest inflation in years. Inflation is now at its highest levels in at least a decade in almost all European Union member states. And in economies such as the United States and Germany it is at its highest level since the early 1990s. This is hardly surprising, however, as we are all facing the effects of global negative supply shocks, such as rising commodity prices and disruptions in the global supply chains. However, central banks make decisions concerning the parameters of monetary policy based on an assessment of the condition of and the outlook for their own economy. Therefore, we should be careful with simple comparisons, because despite the high global inflation, the condition of individual economies varies.
When and under what conditions, in your opinion, could a wage-price spiral occur in Poland? NBP research shows that the labour market is very strong.
The situation of employees on the Polish labour market in recent months is indeed favourable, but at the moment there are no signs of a so-called wage-price spiral. Wage increases are accompanied by improvements in labour productivity, the structure of wage increases planned in enterprises hasn’t changed significantly, and the average rate of planned increases is lower than the current inflation. Nevertheless, with the currently elevated inflation rates driven mainly by external shocks and the expected continued favourable situation of employees, it was justified to increase the NBP reference rates in recent months in order to limit the risk in this area.
One of the charges levelled against the Monetary Policy Council is that the decision to tighten monetary policy came too late. In January you said that “questions concerning the need to raise interest rates are out of this world” and that “the rates will not change, and in any case, they will not rise until the end of the Monetary Policy Council’s term of office, and until the end of my term of office.” Even in September you said: “The central bank should not react to negative supply shocks by raising interest rates. That would be a rookie mistake that would only lead to a reduction in economic growth, or even to a suppression of growth. Those who are urging us to raise rates want us to experience stagnation.” Meanwhile, the first interest rate increase took place just one month later. Wasn’t this a mistake – waiting so long with the first rate hike? Perhaps it wasn’t worth being such a staunch opponent of increases?
In a rapidly changing environment, it is necessary to adjust previous assessments and to take appropriate action. As I’ve said before, the rise in inflation in Poland above NBP’s inflation target is largely due to the impact of global factors. Like many other central banks, we initially assessed that the impact of these factors would be temporary, and at the same time the economy was still exposed to heightened uncertainty related to the pandemic and the durability of the recovery. In September, new data emerged, pointing to a more persistent impact of the external factors driving the inflation increases. New significant data and information also appeared, which confirmed the strengthening of the recovery in economic activity. At the same time, based on the experiences of other countries, it was possible to judge that the upcoming fourth wave would have a less negative impact on economic growth than the previous waves. These factors increased the likelihood that the elevated price growth would persist for longer, and because of that we decided to react.
How would you respond to opinions that because the rate hike cycle started too late, the hikes will have to be greater, and as a result the reference rate will end up being higher? I’d like to mention, for example, the opinion of Dr. Artur Bartoszewicz from the Warsaw School of Economics, who stated on Radio Maryja that the Monetary Policy Council – and especially the Governor of Narodowy Bank Polski – downplayed the risk of inflation for many quarters, thereby misleading the public: “As a result of their actions, households are currently facing enormous costs. This is unacceptable in the case of people holding positions associated with such great responsibility and in view of the role these bodies play in the system.”
First of all, it should be noted that households are currently most acutely affected by increases in the prices of fuels, other energy carriers, and food products. The prices of these goods primarily depend on external factors, such as the exceedingly high global prices of energy commodities and agricultural commodities, which are beyond the control of domestic monetary policy. Meanwhile, the actions taken by NBP, especially in the initial phase of the pandemic, saved Polish families from a significant deterioration in their financial situation. Our actions helped shield the labour market against mass layoffs and a sharp increase in unemployment. In these conditions, today’s price increases – which are undoubtedly felt by households, and which are unpleasant – are bearable thanks to the favourable situation of workers in the labour market. It’s scary to think what would happen if these external price shocks were to hit us amid high unemployment, as it is happening, for example, in the case of Spain.
At the same time, the assessments of the allegedly belated reaction of NBP are unjustified. There is a lot of confusion in this regard. The argument that some other central bank, such as the Czech central bank, reacted faster is completely misguided. Because two or three months do not make a significant difference here, especially for current inflation. Core inflation in the Czech Republic is still higher than in Poland, and most central banks are still only considering tightening monetary policy. Meanwhile, we’ve already made this decision. It is even more of a misunderstanding to claim that a signalling, symbolic and insignificant increase, by 15 basis points, would have changed the situation. Because it wouldn’t have changed anything. Above all, however, like everyone else, we don’t have a crystal ball. Excessively quick, and especially unjustified, interest rate hikes could have halted the economic recovery after the 2020 recession. And this was the main issue to be guided by, because in our actions we must consider all the possible costs and risks. As a result, the current tightening of monetary policy doesn’t have to be much stronger, because growth forecasts are already revised downwards, among other things, due to the soaring prices of raw materials.
What would you say to those who are pointing out that NBP has to rebuild its credibility and who are citing your claims that there would be no recession, no interest rate hikes, and no pressure on the market for a weakening of the Polish złoty
NBP enjoys high credibility, because it initially successfully supported the Polish economy in the pandemic and is now fighting elevated inflation. However, with regard to statements about the future, I would like to remind everyone that all such statements are inherently conditional. No one among us can claim certainty with respect to future events. We build forecasts based on the information available at the given time. When the situation changes, we change our judgments, and then also our decisions.
How do you explain the weakening of the Polish złoty despite the interest rate increases?
There are several factors behind the recent weakening of the Polish złoty, as is usually the case in financial markets. First of all, it is a consequence of the global appreciation of the dollar, which usually leads to declines in the exchange rates of Central and Eastern European currencies, also against the euro. We also shouldn’t forget about the pandemic, which despite everything, continues to affect the sentiment in financial markets, and as we know, in recent weeks there has been a growing wave of cases in Europe and in Poland. On the other hand, the increase in NBP interest rates in recent months, along with the fact that market participants are already assuming a scenario of continued interest rate increases in their analyses and valuations, should be beneficial for the Polish złoty.
Aren’t you worried about the current weakening of the Polish złoty, with the price of one euro reaching PLN 4.65 (the interview was conducted on 17 November – editor’s note)? Isn’t this a reflection of the weakness of the Polish economy, in combination with the excessively low interest rates and with the high inflation? Can we expect that at the end of the year NBP will once again appear on the currency market in order to weaken the Polish currency? Or maybe it’s time to intervene in order to strengthen the Polish currency, because a depreciation of the Polish złoty could additionally drive up the inflation rate?
As I’ve said before, the current weakening of the Polish złoty is influenced by several factors, but Poland’s economic situation certainly isn’t one of them. The condition of our economy is simply very strong. Because of that I would like to emphasise that further depreciation of the Polish złoty exchange rate wouldn’t be consistent with the foundations of the Polish economy, or the monetary policy pursued by NBP. We should also keep in mind that our currency functions within a floating exchange rate regime, although NBP reserves the right to carry out interventions in the currency market. This is a standard practice followed by many central banks around the world, especially in small open economies. Nothing has changed in this regard.
“Poland is following in Turkey's footsteps: we’re talking about high, double-digit inflation, a weak currency, and high debt servicing costs” – this is how the current situation was described by Professor Stanisław Gomułka. How would you respond to such opinions?
Comparisons between the economic situation of Poland and the situation in Turkey are completely unjustified. These are simply two entirely different worlds. It suffices to say that the supposed “high” debt servicing costs, as measured by the yield on 10-year Treasury bonds, amount to just over 3 per cent in Poland, while in Turkey they reach 20 per cent. These figures speak for themselves.
What impact could the prolonged crisis on the border with Belarus have on the perception of Poland by foreign investors, on the exchange rate of the Polish złoty, the bond yields, and the credit ratings?
Events on the border should not affect fundamental assessments of our macroeconomic or financial conditions. However, it cannot be ruled out that especially high-profile events and new developments may affect the quotations of financial instruments in the short term.
You’ve previously mentioned the possible financing of the nuclear energy programme in Poland with the participation of NBP. What could that look like in practice?
In my opinion, with today’s technologies, nuclear power plants are the only source of energy that could replace coal-based energy generation and also stabilise energy prices in the long run. Of course, I’m aware of the fact that the construction of nuclear power plants in Poland is a major technological, social, and financial challenge. NBP cannot directly support the government in the financing of such an undertaking. However, if we have the opportunity to support this process using the available instruments and acting in accordance with our mandate, we will of course take such actions. At this moment, however, before the details of the nuclear power development programme are made available, it’s too early to discuss this topic more broadly.
How would you comment on the government’s plans to allocate 95 per cent of NBP’s profits for the direct financing of the army? Aren’t you afraid that the European Central Bank will express a negative opinion about this project? And finally, what would you say to those who claim that in such a situation “a strong army means a weak Polish złoty, because only then would payouts from NBP’s profits be large.”
First of all, I would like to emphasise that any decisions regarding the allocation of the contribution from NBP’s profits are solely up to the government and the parliament. At the same time, the replacement of the current statutory provision, which provides for a transfer of the contribution from NBP’s profits to the state budget, with a provision on the transfer of this contribution to the Armed Forces Support Fund, would in no way affect the activity of NBP. I’m personally glad that the draft homeland defence act has been prepared, as it will allow the strengthening of the Polish Armed Forces, including the strengthening of their financing.
How would you respond to the charges that both the banknote and the coin depicting Poland’s late President Lech Kaczyński as well as the swift emergency-mode decision on the issuance of a banknote/coin devoted to the defence of the eastern border are simply a part of your re-election efforts?
I will not address these allegations at all. Any response to such opinions would boil down to arguments on whether it is justified to commemorate the tragically deceased President, or to symbolically support Poles involved in the defence of our national borders. In my opinion, such discussions would simply be inappropriate.
What are your plans for a possible second term? Has the President already offered to nominate you again?
It’s no secret that I would like to continue my service as Governor of Narodowy Bank Polski. My plans and actions for the possible second term in office primarily include a continuation of the tasks resulting from NBP’s constitutional and statutory mandate. Today, the most important goal is to lower the inflation rate and to bring it down to the level of NBP’s inflation target in the medium term.
Interview by Paweł Czuryło
NBP Governor interviewed by the Hungarian business daily Világgazdaság
NBP Governor interviewed by the Hungarian business daily Világgazdaság
“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%. […] Further decisions will depend on the future assessment of the situation and the inflation outlook,” says Governor of NBP, Prof. Adam Glapiński in an interview for the Hungarian business daily Világgazdaság
Today’s Világgazdaság has published an interview with Prof. Adam Glapiński, Governor of Narodowy Bank Polski.
Below we present chosen excerpts from this interview.
- 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.
- […] 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. […] 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.
- […] 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.
- […] 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.
- […] our future decisions, as always, will be based 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.
- […] 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.
- 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.
- […] 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.
- 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.
- As far as the exchange rate is concerned […] its current level supports growth in economic activity. […] 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.
- […] 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.
We encourage you to read the entire interview at: Nem lát kamatemelési versenyt a régióban a lengyel jegybankelnök (vg.hu)
NBP Governor interviewed by the Hungarian business daily Világgazdaság
“At the moment interest rates are more likely to rise further, but this may change,” says NBP Governor
“At the moment interest rates are more likely to rise further, but this may change,” says NBP Governor
“At the moment interest rates are more likely to rise further, but it’s hard to say whether this outlook will not change; the Monetary Policy Council does not make statements concerning its future decisions,” wrote NBP Governor Adam Glapiński in response to questions submitted by PAP Biznes. The Governor said that NBP was not definitively withdrawing from the bond markets, indicating that in the face of the current external price shocks, a marked appreciation of the zloty would have only a limited impact on domestic inflation.
“We will see at subsequent meetings what our further decisions will be. What I can say today is that if the incoming data support our current assessment of the economic situation, the likelihood of further rate adjustments is higher than that of maintaining rates at their current level. But let me stress that that this is a conditional likelihood, an assessment made today. It can change, especially considering that the global and economic situation has recently been volatile, and has surprised us more than once,” wrote the NBP Governor.
“Indeed, one cannot rule out that global commodity prices will decline significantly at some point. Or, that for some reason – whether due to a surge in infections, or further disruptions in supply chains – economic conditions will weaken substantially. And then the probabilities may be quite different. In short, please do not perceive the assessment of those odds as a declaration concerning our future decisions,” he added.
The central path of the NBP projection assumes that CPI inflation will run at 4.9% in 2021, at 5.8% in 2022 and at 3.6% in 2023. The central path assumes Poland’s GDP growth at 5.3% in 2021, and 4.9% in 2022 and 2023.
PAP business received Mr Glapiński’s answers on Wednesday night, i.e. before Friday’s release of the GDP flash estimate for 2021 Q3, which surprised economists with its above-consensus level (5.1% vs 4.8%), and before the weakening of the zloty over the weekend.
The NBP Governor explained in his answers that if in the past there had been guidance about for example, leaving the interest rates unchanged, this had always been conditional, i.e. it were presented on the condition that the future will not stray from the assessments at that time.
“But unfortunately the future is unpredictable, and since the circumstances change, we must respond accordingly, so we adjust monetary policy parameters. For this reason we do not make ex ante announcements of ‘a cycle of monetary policy tightening’, because every time the Council’s decision depends on the new information available affecting assessments of the outlook for inflation and the economic climate. The future can only be discussed in terms of probabilities, which, incidentally, are conditional, too,” wrote Glapiński.
Asked what he meant when, during a recent interview for TVN24 he said that after January inflation would start declining and no further interest rate hikes would be necessary, Glapiński said that today interest rates were more likely to rise further than to stabilise, but it was difficult to say whether this outlook would not change.
“All the more I refuse to speculate about what decision may be made at the Council’s subsequent meetings. One thing I can say with full conviction is that the Council will take all the necessary steps to prevent inflation from becoming permanently elevated. We will do all that is required to meet our primary objective: to ensure price stability in the medium term and to support sustainable growth of the Polish economy. And this particular statement can be considered a declaration, or even a commitment,” he added.
In the NBP Governor’s opinion, the question about what target level of interest rates may be suitable for the Polish economy after the pandemic is the same as the question about an interest rate forecast, which NBP does not publish. “It is our conscious decision, as forecasts of this type are often a source of misunderstandings, especially when they are received or interpreted as unconditional, despite the fact that of course they are conditional. (…) Some of the public perceive central bank forecasts as a declaration. Consequently, these forecasts – contrary to the intentions of the central banks publishing them – do little to increase the transparency or the effectiveness of monetary policy at all, but rather become a source of additional challenges. This is why we do not use this communication tool,” Glapiński explained.
In October and November 2021 the MPC raised the reference rate by a total of 115 bps to 1.25%, in increments of 40 bps and 75 bps. The Council justified the interest rate rises with the need to limit the risk of heightened inflation over the monetary policy horizon, striving to bring inflation down to the inflation target in the medium term, in the face of a substantial rise in global commodity prices, persistent disruptions to global supply chains, the anticipated sustained recovery at home, and the favourable situation in the labour market.
NBP IS NOT DEFINITIVELY WITHDRAWING FROM THE BOND MARKET, IT MAY PROVIDE LIQUIDITY
“NBP is not withdrawing entirely or permanently from the bond market. But any operations in this area, should they prove necessary, would aim to support liquidity in the market, and not to enhance monetary easing,” declared Adam Glapiński.
“As I have mentioned on several occasions, even before our October decision to increase interest rates, asset purchases were conducted on a very small scale. Let me remind you that the scale and frequency of our operations has always depended on market conditions, and those have not warranted any significant NBP activity on the secondary market for bonds. In other words, the purchases have expired by themselves. There is no need to terminate them, because at this point their significance is small anyway. This does not mean that NBP is withdrawing entirely or permanently from the market for those securities,” wrote NBP Governor.
“In accordance with the Monetary Policy Guidelines, NBP may buy and sell Treasury bonds or Treasury-guaranteed debt instruments in order to support the liquidity of the market for such securities. In short, should the market situation call for it, NBP may again become active. There is no need for that at the moment, yet we are not permanently withdrawing from the bond market. However, please note that that such operations would aim to support market liquidity, and not to enhance monetary easing because of a change of stance,” he added.
NBP DOES NOT INTERVENE IN THE FX MARKET WITHOUT SUBSTANTIAL NEED
The NBP Governor reiterated in his explanations that the zloty exchange rate was flexible, although NBP reserved the right to intervene, as other central banks do.
He emphasised that NBP did not take any steps in the FX market “without a clear need” and, “it definitely did not launch interventions according to a pre-determined schedule.”
“At the end of last year a risk arose of a strong pro-cyclical appreciation of the zloty, at a time when, in the fourth quarter of 2020, GDP growth lost momentum again, which was why it was necessary to respond. In 2021, we have not undertaken any interventions. So you can hardly say that NBP has a preference for a weaker zloty. We always say that our actions depend on market conditions,” he observed.
Referring to the impact of the zloty exchange rate on inflation, the NBP Governor observed that although the exchange rate influenced import prices, this should not be overestimated.
“With such strong external shocks in the oil, gas and agricultural commodities markets as we are dealing with today, even a substantial appreciation of the zloty has only a limited effect on domestic price growth. At the same time, a strong appreciation of the zloty would certainly weigh heavily on our exporters, some of whom are already struggling with problems related to global factors, and as a result, would have a large-scale negative effect on domestic business conditions,” he said.
THE INCREASE IN THE REQUIRED RESERVE RATIO WAS AN OPERATIONAL MOVE
Along with the interest rate rise, in October the Council also decided to increase the required reserve ratio to 2%, from 0.5%.
The NBP Governor points out that the decision was purely operational in character: it aimed to facilitate the stabilisation of the POLONIA rate close to the reference rate.
“This is not a decision that directly affects the degree of restrictiveness of monetary policy, it only facilitates the implementation of this policy. We have yet to see the effects of this decision, because it takes effect from the reserve maintenance period starting on 30 November. From that moment on, banks will keep higher average balances on accounts with NBP, which should facilitate the achievement of the operational goal of monetary policy, which is to keep the POLONIA rate close to the NBP reference rate,” Glapiński wrote.
Rafał Tuszyński (PAP Biznes)
The Governor of NBP and the President of Republic of Poland present Poland in the world’s media
The Governor of NBP and the President of Republic of Poland present Poland in the world’s media
“The great industriousness and energy of Poles was the key to overcoming the difficulties and achieving progress in many different fields,” writes Professor Adam Glapiński, Governor of NBP
Today the article of Professor Adam Glapiński, Governor of NBP, entitled The Polish economic miracle has been published in the Polish monthly “Wszystko co Najważniejsze” and in the world’s media as part of the project “We are telling the world about Poland”.
We invite you to read the article
Besides the Governor of NBP and the President of the Republic of Poland Andrzej Duda, the authors of the current edition of the project “We are telling the world about Poland” include the Minister of Culture and National Heritage Professor Piotr Gliński, the President of the Institute of National Remembrance Karol Nawrocki, the former Minister of Foreign Affairs and former Minister of National Defence of the Republic of Lithuania Linas Linkevičius, the historian from Princeton University Professor Harold James, and the former Director of the Department at the Yad Vashem Institute which bestows the honorary title “Righteous Among the Nations” Mordecai Paldiel.
Professor Adam Glapiński’s article, along with the other articles published as part of the project “We are telling the world about Poland”, will also be published next week in over 50 media outlets around the world.
The latest edition of the project “We are telling the world about Poland” is carried out by the Institute of New Media, with the support of the Institute of National Remembrance, the Ministry of Foreign Affairs, Narodowy Bank Polski and the Polish Press Agency.
All the articles in the project are published on the WszystkoCoNajwazniejsze.pl website.
Governor of NBP on Program 1 of the Polish Radio: NBP does not ignore the current high inflation
Governor of NBP on Program 1 of the Polish Radio
Narodowy Bank Polski does not ignore the current high inflation: it is the number one issue in what we are doing now, says Prof. Adam Glapiński, Governor of NBP
Narodowy Bank Polski has announced that on 12 September the Governor of NBP Prof. Adam Glapiński was interviewed on Polskie Radio (Polish Radio) in the programme “W otwarte karty” (“All Cards on the Table”). The interview was about the Governor’s evaluation of the current situation in the Polish economy.
Selected statements by Prof. Adam Glapiński, Governor of NBP, are quoted below:
- According to this best knowledge – which is confirmed by foreign and international institutions, such as the World Bank and the International Monetary Fund […] – inflation in Poland should fundamentally slow down next year [in 2022] […]. Its level should fall significantly to be close to the upper limit of deviations from the inflation target, so somewhere around 3.5 per cent.
- Narodowy Bank Polski Narodowy Bank Polski does not ignore it [the high inflation index]: it is the number one issue in what we are doing now and what we have always done, because this is our constitutional and statutory task. Although we have a lot of other important commitments.
- We pursue our policy in total independence of the government’s policy. […] So right at the moment the policy of low interest rates we are pursuing on account of the needs of the economy, finance, credit, credit market etc., etc – it is very supportive of the government. The government – but hence also the state and the people, because low interest rates will of course radically diminish the debt servicing costs of the state. Indeed, this cost is dramatically lower, which improves the government’s budget position.
- If the economy takes off, if there are no more threats of lockdowns etc., then we will naturally raise interest rates, should the situation require it.
- We should make vast purchases of gold. We already have quite a large amount of this resource and we would like to have much more.
- This is an exceptionally good time for the Polish economy and there is no doubt that the whole world is envious of us, in particular Europe. However, what is a great burden on us is the EU’s climate policy […] In my opinion, this revolution is too revolutionary […] too rapid. For Poland at least, a country relying on coal, there should be different adjustment periods […] We should have a transition period at least twice as long.
Governor of NBP, Prof. Adam Glapiński for „PAP Biznes”: NBP will not allow high inflation to become entrenched
NBP will not allow high inflation to become entrenched,
says Governor of NBP
Narodowy Bank Polski will not allow high inflation to become entrenched and, once specific conditions arise, is ready to withdraw the monetary accommodation. But for now, given the nature of inflationary shocks and uncertainty about the pandemic, this would be very risky – Governor of NBP Adam Glapiński told PAP Biznes.
1. Most economists and certain members of the Monetary Policy Council call for the start of a cycle of interest rate increases, citing high inflation. When is the earliest that NBP should decide to withdraw the monetary accommodation, and how could the process of interest rate hikes proceed, in terms of its pace, scale and the target level?
Governor of NBP Adam Glapiński: Let me remind you that the NBP monetary policy easing in 2020, and then maintaining the monetary accommodation in the current year, were a response to the unprecedented global health, social and economic crisis triggered by the COVID-19 pandemic. The Bank knows today that the measures proved effective and provided support to Polish enterprises and households. That helped the Polish economy recover from the COVID-19 pandemic crisis much faster, with lower losses than in other European countries. The success is also due to the central bank and an appropriate monetary policy. Let me say it again, without large-scale monetary policy easing during the pandemic, Poland would now be in a much worse condition, with much higher unemployment, bankruptcy of many companies, substantially lower economic growth, lower wages, a significantly worse fiscal position and higher credit losses of banks. So, this is what you should start with when discussing monetary policy, also today when the pandemic is not yet over.
At present, the Polish economy has recovered a significant part of the pandemic-related losses, which many commentators take for granted and at the same time pay attention solely to inflation. NBP analyses inflation processes very thoroughly. NBP takes inflation very seriously and it is at the centre of our attention, because the basic objective of the activity of NBP is to maintain price stability. However, let me remind you that inflation may, from time to time, run above or below the inflation target, including also outside the defined band for deviations from the target due to macroeconomic shocks occurring in the economy. The monetary policy response to these shocks must be flexible, as it depends on their causes and an assessment of their sustainability.
In the event of inflation deviating from the target, NBP determines in a flexible manner the desired pace of the return of inflation to the target. This is because the good of the Polish economy matters most and bringing inflation back to the target quickly may involve substantial costs. And what’s more, when making monetary policy decisions, the Bank also has to consider the lagged impact on the economy and inflation. This transmission lag usually amounts to several quarters and may change over time.
That is why when answering your question whether elevated inflation requires tightening monetary policy now, you need to start with an analysis of the causes of inflation and the central bank’s potential impact on the current level of inflation. Next, you need to consider what the inflation outlook within the monetary policy horizon is.
Well, the price growth currently observed is to a large extent independent of domestic monetary policy. Firstly, this is the effect of strong growth in commodity prices in the global and European markets, including the prices of crude oil, gas and metals, and recently, which is an unfortunate development, of agricultural commodities. This is coupled with a domestic increase in the regulated prices of electricity, related to the EU climate policy, and waste disposal charges. Lastly, the prices of some goods are pushed up by disruptions in the global supply chains caused by the pandemic, downtime in the manufacturing industry, and disruptions in international transport. All these factors are beyond NBP’s control and therefore it cannot mitigate their impact. What’s more, all of them are negative supply shocks, which means that on the one hand, they drive up costs and prices, and on the other, they hamper economic growth. Let me say this again: no matter how NBP tried to lower these prices, it has no tools to do it. Through its monetary policy, the central bank can influence aggregate demand in the economy, but this demand has only just returned to its pre-pandemic level. Furthermore, Poland is still far from the levels that would have been achieved if the pandemic had not pushed the economy off the sustainable growth path that Poland was on prior to the outbreak of the COVID-19 virus.
Therefore, central banks are now primarily interested in whether the post-pandemic economy will develop fast enough to produce strong and, above all, sustained demand pressure resulting in the inflation rate remaining above the inflation target permanently. Because only such inflation, which is driven by a rise in demand related to the good economic situation, can be reduced by the central banks without generating high costs to the economy and the labour market. What we are observing today is the realisation of pent-up demand after the pandemic. It is important to what extent the demand will continue in the longer perspective, when households have already caught up with what they could not do during the pandemic – mainly using some services. Therefore, many central banks are primarily thinking about the inflation outlook within the monetary policy horizon.
For the time being, we are facing another wave of the pandemic whose economic fallout is unknown. That is why most central banks are in no hurry to tighten monetary policy. At the same time, all forecasts show that the rate of price growth will decline next year. Obviously, the scale of the decline in inflation will most likely be curbed by, among others, further increases in electricity prices, but also by demand pressure, so inflation may remain markedly above the level of 2.5%. The Bank does not yet know how strong and lasting this pressure will be.
From NBP’s point of view, what matters most is how the economic situation will develop next year, how the labour market will look and how this will impact inflationary pressures. If economic conditions remain very good, the situation in the labour market remains favourable and inflation exceeds NBP’s inflation target, then it will be justified to withdraw the monetary accommodation. For the time being, given the nature of the shocks that are pushing up inflation and, at the same time, the very high uncertainty about the course of the pandemic and economic conditions, monetary policy tightening would be very risky. Therefore, it does not make sense to speculate now about the possible pace of interest rate hikes or the target interest rate level, and even more so about their “normalisation”. All will depend on the economic situation of Poland and inflation, as well as on changes in the environment of the Polish economy. One thing I can firmly assure you is that the central bank is not ignoring elevated inflation and will not let it become entrenched. On the other hand, the pace at which inflation is lowered must factor in the economic and pandemic-related situation, and also the nature of the price shocks. także naturę szoków powodujących wzrost cen.
2. What conditions must be met for NBP to withdraw the monetary accommodation? Why not increase interest rates now? Does NBP see signs of demand-pull inflation?
Governor of NBP: A fast decrease in inflation, especially when it is pushed up by demand shocks, at the expense of halting economic recovery which has just begun, would be a very costly mistake now. Not to mention that the presently elevated annual inflation rate, which will remain at this level for some time, largely stems from past developments, therefore it is basically given. Obviously, once high inflation becomes entrenched, it will be justified to withdraw the monetary accommodation. The monetary policy response will aim to ensure that inflation will return to the target in the medium term.
In many economies across the world, inflation has been at its highest level for many years. Like in Poland, inflation in the United States exceeds 5%, with core inflation also high. In the euro area, inflation is 3% and is above the ECB inflation target, and yet there was even deflation in the euro area towards the end of 2020. In Germany alone, CPI inflation in August amounted to 3.9%, which is the highest level since 1993. Furthermore, the situation in these economies has significantly improved, the labour market is performing better, but despite this most central banks continue to pursue an accommodative monetary policy.
As I have said, what a number of countries share is that inflation is pushed up by global disruptions from the pandemic, including also the base effect. This concerns commodity prices, the shortages of many semi-products, which by the way is becoming a major problem that limits the production of many industrial enterprises. Due to the shortages of semi-products and other supply-related problems, coupled with rising commodity prices, Germany’s PPI inflation exceeded 10% in July and was the highest since the oil price shocks of the 1970s. In Poland, additional inflationary factors include increases in administered prices, primarily of electricity and gas prices as well as waste disposal charges. Obviously, the higher prices are also the result of the rebound of demand after the pandemic, which collides with the supply constraints. It is visible not only in the markets of certain goods, but also in certain services. However, it is very important to distinguish between a temporary rebound and a permanent rise in demand.
The main question is whether demand-pull inflation is permanent enough, whether its rise is strong enough to pose a risk of permanently high inflation. Let me stress again that if the optimistic scenarios prove right and subsequent waves of the pandemic have no big negative impact on the economy, the rate of economic growth remains high and forecasts point to inflation hovering permanently above the NBP target, then it will be justified to withdraw the monetary accommodation.
3. How does NBP stabilise inflation at the level consistent with its inflation target, as indicated by MPC press releases, since CPI exceeds 5%?
Governor of NBP: The Monetary Policy Council (MPC) always speaks of stabilising inflation in the medium term and not of the current index. Let me remind you that the NBP target is a medium-term target of 2.5% with a band of +/- 1 percentage point. As it has been explained in Monetary Policy Guidelines for years, due to macroeconomic and financial shocks, the medium-term inflation target means that inflation may temporarily run above or below the target and even run outside the band for deviations from the target. What’s more, the MPC points out explicitly that the response of monetary policy to the shocks is flexible and depends on their causes, and an assessment of how permanent their effects are, including their impact on inflation developments. In the case of inflation deviating from the target, the Council determines in a flexible manner the desired pace of the return of inflation to the target, as bringing inflation to the target quickly may entail substantial costs for macroeconomic or financial stability.
Since the start of my tenure as Governor of NBP, inflation has averaged at 2.3%, so it has been consistent with the NBP inflation target. In this period, there was an episode of deflation, and now inflation exceeds the upper limit of the target. Today, all forecasts indicate that inflation will decline next year. This means that its elevated level is temporary. This is the result of the unprecedented pandemic-related shock that hit the global economy.
Narodowy Bank Polski is stabilising and will continue to stabilise inflation in the medium term at the level consistent with NBP’s inflation target. However, you can also ask about the pace of bringing inflation down to the target. And its pace, especially given the negative demand shocks, cannot be overly fast, because it could undermine the economic recovery. As I have said, NBP is by no means ignoring elevated inflation, but the Bank has to apply remedies that are adequate to its causes and which, at the same time, do not weaken the Polish economy.
4. How do the parameters of the required reserve ratio fit into monetary policy tightening and when its current ones may be subject to change? What would be an optimal level of the required reserve ratio and its remuneration rate after the pandemic? Should the remuneration rate on the required reserve ratio be lowered further?
Governor of NBP: The main aim of the use of the required reserve system is to contribute to the stabilisation of short-term market rates. Therefore, as far as the required reserve system is relevant for monetary policy implementation, it is practically of no relevance to its restrictiveness. After the pandemic, the Bank may return to a higher level of the reserve, but its specific level is yet to be discussed. An appropriate required reserve ratio must take into account liquidity conditions in the banking sector and, at the same time, support the potential to effectively stabilise short-term market rates at a level required by NBP.
As far as the remuneration on required reserve funds is concerned, both the literature on the subject and practice of central banks in developed countries show that for the required reserve to perform its role of a stabiliser for money market short-term interest rates well, it should be cost-neutral for banks, that is, bear interest at the market rate. This means that in our realities the optimal level of the remuneration on required reserve funds is the level of the NBP reference rate, unless there are reasons to set the remuneration rate at a different level.
5. When could NBP end its asset-purchasing programme? Will NBP reinvest the capital from maturing bonds after the programme ends, and are ad hoc interventions possible on the bond market and on the FX market?
Governor of NBP: Many commentators have recently been wondering when the Fed or the ECB will begin to taper asset purchases. This is a natural question, considering that the banks are making purchases on a large scale. The ECB continues to buy securities at a value of EUR 100 billion per month, which corresponds to nearly 1% of the GDP of the euro area. On the other hand, the Fed purchases assets at a value of USD 120 billion per month. For comparison, in August NBP purchased bonds at a value of less than PLN 1 billion, or less than 0.05% of Poland’s GDP.
Narodowy Bank Polski already substantially reduced the scale of structural purchase operations of Treasury bonds and government-guaranteed bonds a long time ago. Over the last 12 months, the bank purchased fewer assets than in April 2020 alone, that is during the peak of the pandemic-related recession. All observes know well that, unlike the major central banks, NBP reduced the scale of purchases a long time ago. Therefore, NBP does not have to announce any reductions in the scale of purchases or any tapering of the programmes, because it has already de facto occurred. Furthermore, it would not be in line with the rules adopted by the Bank. From the very beginning of the NBP purchases, the Bank has consistently stuck to the rule according to which the deadlines and scale of the operations depend on market conditions. That is why NBP can adjust, on a daily basis, the scale of operations to the market situation which – as is well known – may change quickly amid the pandemic.
In a word, NBP is maintaining purchases, the scale of which is adjusted to market conditions. However, as NBP begins to withdraw the monetary accommodation and raise interest rates, the purchase programme will end. As to the re-investment of maturing bonds, the Bank can do it, but it is not decided yet – everything will depend on market conditions in the future.
6. Why does the MPC keep referring to the zloty exchange rate in the press releases following its meetings? What is the role of the exchange rate in NBP’s policy at the moment? How does NBP assess the current level of the zloty exchange rate?
Governor of NBP: The exchange rate is an important parameter and absorber of shocks in the Polish economy, as I have repeatedly pointed out. The zloty exchange rate is flexible, i.e. it is determined by market conditions; however, the central bank may intervene in the foreign exchange market. At the moment we are still dealing with the pandemic, and pandemic uncertainty persists – as I have already pointed out – which is the reason why we are not withdrawing monetary accommodation. Given this situation, an appreciation of the zloty would not seem beneficial to the economy, as it would partially wipe out the effects of the monetary accommodation. That is why for some time we have been reminding the public in the MPC messages that NBP may intervene in the foreign exchange market and that the potential interventions will depend on market conditions.
7. What are the current NBP forecasts for GDP and inflation, considering the latest GUS readings (flash inflation, GDP structure in 2021 Q2) in the horizon of the rest of this year and in the following quarters? What is the current balance of risks for GDP and CPI?
Governor of NBP: This is what we are going to discuss at our next MPC meeting. Generally, GDP and inflation data have not shown much change to the path of those variables itself in the successive quarters. Short-term inflation will probably run a little higher than in the July projection, but, as I have said, will start dropping off from the second quarter of next year. My one personal concern is the rise in gas prices and possible further energy price increases, as this would mean another negative supply shock.
In turn, as regards the prospects for the business climate, things look good – assuming, though, that the next wave of the pandemic will not hamper economic activity in any substantial way. The projection envisages GDP growth of 5% over the next 3 years. This would be a very positive scenario for Poland. However, whether it will materialise will depend on the path of the pandemic – and on global economic conditions. At the moment, some little chinks have appeared in the Chinese data and, to some extent, in those from the USA. Also our data have shown a certain recent weakening in the demand for some goods. In the same vein, investment in 2021 Q2 proved weaker than expected.
8. How does NBP assess the situation in the labour market and the wage pressure – concerns about a wage-price spiral have been voiced – in the context of monetary policy conduct? To what extent does NBP take into account the currently elevated inflation expectations?
Governor of NBP: The situation in the labour market can be assessed as generally good. At the same time, our research shows that wage pressure in enterprises in 2021 Q2 was still weaker than before the onset of the pandemic. We must also bear in mind that unemployment is still higher than before the pandemic, and employment – despite having increased – is lower. In addition, the state continues to support the labour market with extraordinary measures by continuing to subsidise some jobs.
On the other hand, what we are seeing now is robust GDP growth combined with rapidly rising labour productivity. As a result, the estimated 2021 Q2 unit labour cost growth in the economy declined substantially and might even have been negative. In manufacturing, the growth in unit labour costs has been negative for several months. So looking at the labour market, we don’t see any cost pressure coming, let alone a danger of the so-called wage and price spiral. Of course, enterprises’ expanding wage bills do add to inflationary pressure, yet in our current situation this is mediated not so much by the rising unit labour cost but rather by higher demand for goods and services. This will lead to a relatively rapid closing of the output gap in the Polish economy, which in our estimates is still negative. Of course this will happen only if our optimistic economic growth scenario materialises without being disrupted by a new wave of the pandemic.
As for the inflation expectations, they are strongly determined by current inflation levels. But, incidentally, in August the distribution of consumers’ expectations improved somewhat. Professional forecasters, on the other hand, know that inflation will decline next year, which is reflected in their forecasts.
9. What is the likely impact of the Polish Deal on inflation, GDP, and the labour market?
Governor of NBP: Work on tax changes under the Polish Deal is in progress. In particular, government officials have recently announced that the project will be subject to modifications with regard to the health contributions of entrepreneurs. Therefore it is too early for detailed assessments. I think that at the point when we have finalized the November projection and will be drawing up the Council’s Opinion on the draft budget for the next year, the full shape of the project will be known and then we will address its macroeconomic consequences.
In general, the submitted proposals will mean higher disposable income for most taxpayers, in particular those from the lower and medium-range income brackets. So, a certain consumption stimulus should be expected. On the other hand, the reduced tax burden will make occupational activity more attractive. By increasing labour supply, this may mitigate the wage pressure in the economy.
10. What is the significance for NBP monetary policy of the policy of the Fed, which has recently suggested (see the Fed Chairman speech at Jackson Hole) that it will not rush to taper the asset purchase programme, let alone raise interest rates?
Governor of NBP: The Fed is a global central bank, the central bank of the world’s largest economy, so naturally we monitor its monetary policy closely. Particularly considering that this policy has an overwhelming impact on the global financial markets, and thus also on global economic conditions.
We have our own monetary policy, of course, but some of the challenges the Fed is facing today are similar to those we are facing. Specifically, inflation in the USA is as high as in Poland, GDP has returned to the pre-crisis level, and yet the Fed continues its accommodative monetary policy. Incidentally, the Fed’s policy is far more accommodative than ours, as the Fed is still purchasing assets on a massive scale.
What Chairman Jerome Powell said at Jackson Hole was that heightened inflation will probably prove temporary and does not call for any action just yet. A premature tightening might be a major mistake, particularly amid the next surge of the pandemic. He pointed out that the structural factors which have weighed on inflation in the past few decades remain in place and will probably continue to dampen inflation after the pandemic turmoil has faded. This testifies to the Fed being mindful of the fact that the main concern of most central banks in the previous decade was inflation at depressed levels; there is awareness that the risk of inflation running persistently below the target will probably make its presence felt again soon.
At the same time, he said that if the elevated inflation were to become persistent, the Fed would obviously take due measures. We view things similarly. If a risk of persistently heightened inflation should emerge, the monetary policy stance will be tightened. At the moment it is too early for such actions: the uncertainty related to the pandemic is too high and our actions shouldn’t hamper the recovery that has barely begun. In his speech, the Fed chairman argued that inflation is elevated temporarily as opposed to permanently. He quoted five important arguments in support of this proposition. At the same time, he said that the Fed would monitor inflation developments closely, to assess whether it hasn’t misjudged the situation after all.
Neither can we make firm statements about the future, especially with uncertainty running so high. All the same, notwithstanding these difficult circumstances we have to make decisions about the parameters of monetary policy. Of course not changing these parameters is also a decision with important implications for the future situation of the Polish economy. My judgement is that inflation will be trending downwards next year, although it is difficult to say whether it will return to the target on its own accord. If not, we will still have time for an appropriate response without incurring too many losses. If, on the other hand, the pandemic disrupts the recovery, a premature monetary policy response would be very costly for the Polish economy. I hope this is a sufficient explanation of why we, like many other central banks in developed economies, are cautious about withdrawing monetary accommodation. (PAP Biznes)
Governor of NBP, Professor Adam Glapiński in „Financial Times”
Governor of NBP, Professor Adam Glapiński in „Financial Times”
Inflation data not worrying, says Poland’s central bank chief.
Adam Glapinski also notes there is ‘no sign’ of property bubbles fuelled by low interest rates
James Shotter in Warsaw
Poland’s central bank governor has dismissed short-term concerns over inflation, even as other central banks in the region have begun to raise interest rates to combat a surge in prices. Adam Glapinski said the data was not currently “worrying”, noting that inflation was partly driven by transient and external factors such as base effects, and fuel prices. Currently the second highest in the EU, Polish year-on-year inflation hit 4.7 per cent in May, before easing to 4.4 per cent in June.
“When we subtract from headline inflation the impact of regulatory and supply-side factors we get inflation close to 2.5 per cent, which is the midpoint of our inflation target,” he told the Financial Times. “So at the moment, there is no cause for alarm, especially as we also expect headline inflation to fall.”
Inflation has rebounded in many countries as pandemic restrictions are lifted, prompting some economists to call for central banks to wind down the stimulus measures adopted during the crisis. Central banks in Hungary and the Czech Republic both raised rates last month.
Glapinski said that the central bank, Narodowy Bank Polski, would watch “very carefully” for signs that rising wages were driving up prices as the economy accelerates after pandemic lockdowns. He expects Poland’s economy to grow more than 5 per cent next year.
“If we see that there is a tendency that in a few quarters this rise in prices could be driven by these demand-side factors, then we will act. When will it happen? It’s hard to say precisely, but rather not earlier than in the autumn of this year. Or maybe only halfway through next year,” he said.
“Our approach is similar to that of the Federal Reserve, or the ECB: we are waiting for the economic recovery to become certain and solid, and then we will observe whether there is a risk of a rise in inflation. And we certainly won’t hesitate: we will act immediately as soon as it is necessary.”
Some economists argue the NBP should already be taking steps to tame inflation, as Poland’s labour market is showing signs of tightness. Unemployment, standing at 3.8 per cent of the workforce, is among the lowest in the EU, according to Eurostat.
“We have a very low unemployment rate, which is putting pressure on wages. And on top of this, the Polish Deal [a government programme of tax and spending pledges] will boost demand,” said Alicja Defratyka, an economist at ciekaweliczby.pl.
She added: “I think that inflation is likely to be between 4.5 per cent and 5 per cent by the end of this year, and it could be even higher if all the measures proposed in the Polish Deal come into force.”
Glapinski said the NBP did not have “any specific concerns” about the labour market, and that the inflow of workers from neighbouring Ukraine and Belarus would “certainly be enough to meet the growing demand for labour” in coming years.
“Of course we are watching to see whether any bottlenecks occur in the labour market, but at the moment we don’t have any excessive pressure on wages. Wages are rising — but more slowly than labour productivity. Unit labour costs are not rising,” he said.
He added: “The worst thing that could happen would be a wage-price spiral but such a risk is very limited. We don’t have this, and at the moment we certainly don’t see it happening in the coming quarters. We don’t see it happening next year either.”
Economists have also raised concerns about ultra-loose monetary policy fuelling bubbles in the real estate and finance sectors. However, Glapinski said that Poland’s banks were well-capitalised, and that the real estate market was not overheating.
“At the moment there is no sign of bubbles in the real estate sector that are fuelled by low interest rates. And we don’t expect it,” he said.
“Bear in mind that these low interest rates have only been in place for a relatively very short time, and according to the market expectations next year we will already start to leave this territory. And the cycles in real estate are much longer.”
Article by Prof. Adam Glapiński in "L'Opinion"
NBP Governor and Poland’s Prime Minister on post-pandemic Poland in international media
The global initiative of Narodowy Bank Polski, apart from the articles by Governor of NBP Prof. Adam Glapiński and Prime Minister of the Republic of Poland Mateusz Morawiecki, also presents the contributions of historians and other intellectuals such as William A. Allen, Prof. Michał Kleiber, Marcin Jakubowski, Jarosław Szarek, Prof. Aleksander Surdej, Andrzej Krajewski and Artur Szklener.
Warsaw, 25 June 2021 – The article “Post-Pandemic Stabilisation and Challenges” by Professor Adam Glapiński, Governor of NBP, appears in today’s issue of the French journal L’Opinion.
The article is released as part of the project “We’re Telling the World about Poland”, whose latest edition is devoted to innovative Poland and ideas for exiting from the COVID-19 pandemic.
In his article for L’Opinion, Professor Adam Glapiński, Governor of NBP writes that “[…] determining the optimal exit strategy from unconventional monetary policy measures is quite a challenge. However, one can certainly say that this process – both around the world and in Poland – should be wisely spread over time and treated as an element of continuity of the central bank’s policies, which on the one hand cannot undermine the foundations of the post-crisis growth, and on the other hand, cannot allow the build-up of macroeconomic and financial imbalances.”
“We have ambitious plans for the future, which all have one thing in common – to facilitate Poland’s catching up with the wealthiest countries. In pursuit of this goal, we must not only conduct prudent monetary policy, but also fully take advantage of the opportunities created by the increase in our foreign exchange reserves,” the NBP Governor writes further on in the article.
“[…] we must prudently lead Poland out onto the path of sustainable growth and convergence as well as wisely invest our growing reserve assets. At stake is a secure future and further improvement in the living conditions of millions of Polish citizens,” Prof. Adam Glapiński emphasises in his article for the French newspaper.
L’Opinion is one of the most influential newspaper titles in France and the main partner of The Wall Street Journal in Europe.
Prof. Adam Glapiński’s article, accompanied by texts by the Prime Minister of the Republic of Poland, historians and other intellectuals published as part of the project “We’re Telling the World about Poland,” is also appearing this weekend in more than 50 media around the world. All the articles are devoted to innovative Poland; they are published on the website www.WszystkoCoNajwazniejsze.pl.
The latest edition of the project “We’re Telling the World about Poland” is carried out by Instytut Nowych Mediów (the New Media Institute) with the support of the Institute of National Remembrance, the Ministry of Foreign Affairs, Narodowy Bank Polski and the Polish Press Agency.
Article of the Governor of NBP, Professor Adam Glapiński in Dziennik Gazeta Prawna
We are ready for all scenarios
One year has just passed since the COVID-19 pandemic reached Poland. For the past 12 months we have been fighting not only for the health and lives of Poles, but also for the wellbeing of our economy. Just as in the case of efforts to slow down the spread of the virus, quick and decisive action was necessary in order to limit the economic costs of the pandemic. Despite many questions marks – regarding transmission of the virus and the impact of the pandemic on the decisions of economic entities – in the past year NBP took rapid and decisive actions that significantly mitigated the negative economic impact of the pandemic shock.
We cut interest rates significantly and launched the purchase of bonds issued and guaranteed by the State Treasury. Although the decisions concerning monetary policy were made very swiftly and amid great uncertainty, today we can safely say that – together with the fiscal policy measures implemented – they have provided effective support for the Polish economy. This success has been reflected not only in the data on GDP, according to which the decline in domestic production in Poland was less than half the average decrease recorded in Europe. Indeed, the most important measure of our success has been our ability to limit the scale of costs that Polish families and Polish entrepreneurs are forced to bear as a result of the pandemic.
In particular, we managed to avoid a deterioration in the situation in the labour market, as evidenced, among others, by the lowest unemployment rate in the whole of the European Union, as well as the still robust, positive rate of growth in real wages. The enterprise sector is coping rather well in spite of the pandemic, although the situation is obviously highly varied, and the services sector continues to suffer the most. However, despite the pandemic-related restrictions, the number of companies that went bankrupt last year was lower than the number of bankruptcies in 2019. Moreover, the balance of funds held by companies and households on bank accounts is now much higher than before the outbreak of the pandemic
It can therefore be said that the results of our struggles with the economic consequences of the pandemic have been positive thus far. Unfortunately, it is still too early to declare complete success. The pandemic is not over yet, we are still seeing widespread infections across Europe, while Poland is currently battling the third wave of the disease. It is difficult to predict when we will be able to fully contain the pandemic and when its negative impact on economic activity will finally end.
What is encouraging, however, is that the successive waves of the pandemic are causing less and less economic damage. The available data suggest that many economies – including Poland – are adapting to functioning in pandemic conditions. Moreover, the prevailing view among economists is that along with the decrease in the number of cases – which is expected to happen soon – as well as the lifting of most of the restrictions, many countries will experience a pronounced economic recovery. Currently, it is most commonly assumed that a significant improvement in the epidemic situation will occur in the second half of the year. Forecasts of economic growth around the world – formulated on the basis of such assumptions – suggest that the situation in the global economy will significantly improve by the second quarter of this year. Economic growth is also expected to recover in our immediate economic environment, although the scale of GDP growth in the euro area is likely to remain moderate this year.
A significant economic recovery is also expected to begin in the Polish economy starting in the summer months. Such a scenario is indicated, among others, in the NBP projection published in March. Following a strong rebound in the second quarter of this year – additionally reinforced by the statistical base effects associated with the sharp decline in GDP in 2020 – economic activity is expected to grow robustly in the remaining part of the year, supported by the strong performance of exports and a recovery in domestic demand. According to the projection, the subsequent years will also see a dynamic growth of the Polish economy. In short, NBP’s March projection envisages a highly positive development of economic conditions in Poland in the coming years. We can only hope that these predictions will come true.
So far, however, the economic recovery has been limited and has only applied to selected sectors of the economy, especially those oriented towards exports. Meanwhile, for the time being, slower growth in manufacturing industries oriented to the domestic market, along with the decline in retail sales, point to the weakness of domestic demand. Of course, this does not mean that the situation will not improve later in the year. However, two conditions have to be fulfilled for that to happen. Firstly, it is necessary for the epidemic situation to improve significantly, which will probably happen along with the progress of the vaccination campaign. Secondly, this improvement must contribute to a revival in consumer spending and investment. Although we obviously cannot control the course of the pandemic, we can continue to support households and businesses by maintaining an expansionary monetary policy stance, thereby increasing the chances of a strong and sustainable economic rebound following last year’s recession.
This is not only possible but also highly desirable, due to the current and projected path of inflation. A continuation of the measures pursued so far will, in fact, be conducive to the achievement of NBP’s basic objective, i.e. maintaining consumer price inflation at 2.5 per cent +/-¬¬1 percentage point. In January, the consumer price index was 2.7 per cent, and in February it stood at 2.4 per cent, which means that it was fully in line with the NBP inflation target. Of course, there is also considerable uncertainty when it comes to the inflation outlook. We know that this year inflation will once again be pushed up by regulatory factors, that is, mainly the already increased electricity prices and the planned further increases in waste collection fees. What’s more, in the coming months the increase in the annual inflation rate will be driven by the so-called base effects on fuel prices, along with an additional increase in global oil prices. Taken together, these factors will significantly accelerate price growth, which could reach approximately 3 per cent starting from the second quarter. Therefore, until the end of the year, an inflation rate slightly higher than the current level – although still remaining within the range of deviations from the NBP inflation target – will largely be the result of negative supply shocks, that is, factors beyond the direct control of monetary policy. However, this will certainly not be the result of excessive demand pressures in the economy as a whole. Even if the expected economic recovery materialises this year, it will take place after a pronounced decline in GDP last year, and as a result the output gap will remain negative. That is why the NBP projection predicts that core inflation will gradually decline over the course of the next year, despite being pushed up by increases in administered prices. The projection also suggests that in subsequent years dynamic growth in economic activity will be accompanied by a gradual increase in core inflation; however, the overall rate of price growth will remain consistent with the NBP inflation target.
Of course, all predictions are characterised by uncertainty. This is especially true for projections relating to the end of the projection horizon, that is, the year 2023. A lot will depend on the course of the pandemic and its impact on economic growth in Poland and in Europe. Therefore, we should hope for the best possible outcome, but we should also be prepared for the materialisation of less favourable scenarios. We hope that soon we will manage to bring the pandemic under control, which will enable the Polish economy to return to rapid growth and to our Polish “economic miracle.”
However, the activities of NBP cannot be based on wishful thinking. Our task is to increase the chances of a return to rapid economic growth after the pandemic, while maintaining price stability and macroeconomic balance. This necessitates the continuation of the monetary policy measures implemented so far. We have to ensure low costs of financing for all sectors of the economy. At the same time, we cannot allow any abrupt changes in the exchange rate or bond yields to limit our growth prospects, because these factors determine the growth potential of the Polish economy over the course of many years to come. The very reason why we have our own currency, the Polish złoty, is to ensure that we are able to conduct an independent and autonomous monetary policy, which – together with the floating currency exchange rate – acts as a shock absorber. Therefore, especially in difficult times, our currency helps us reduce the negative impact of external shocks on the economy and enables us to make up for the losses faster. Thanks to our resilience to crises, which we have developed by having our own currency, we are able to stay on the path of convergence and continue our efforts at catching up with the wealthiest countries. What is ultimately at stake here is the continued improvement in the financial situation of Polish families and Polish entrepreneurs.
The text was first published in Dziennik Gazeta Prawna on 23 March 2021
Interview with the Governor of NBP summing up the year 2020 for Obserwator Finansowy
Since mid-December 2020, the NBP Management Board has been purchasing foreign currencies on the FX market in order to strengthen the impact of NBP’s monetary policy easing on the economy, said the Governor of NBP, Prof. Adam Glapiński in an interview for Obserwator Finansowy.
Mr. Governor, what can be said about 2020 from today’s perspective?
Governor of NBP, Prof. Adam Glapiński: Today, although the epidemic situation is still difficult, we can say that we have successfully faced the challenges of the pandemic and the resulting downturn. Thanks to our joint efforts the Polish economy and the Polish state coped quite well with the pandemic crisis.
The pandemic has had strong, negative effects on the global economy.
The measures aimed at inhibiting transmission of the virus – in particular, the lockdown of certain sectors of the economy in many countries – have had a significant, negative impact on economic activity. This impact was additionally exacerbated by the decisions of entrepreneurs and ordinary people who – in the face of increased uncertainty about the future economic situation and concerns about health – limited their spending on investments and consumption. The negative economic effects of the pandemic were also exacerbated by the fact that they occurred simultaneously in many economies, severely reducing international trade. As a consequence, in the second quarter of 2020, the global economy experienced a slump on a scale not seen for decades.
How did Poland fare against this background?
In the second quarter of 2020, Poland also recorded a significant decline in GDP. It was a high, but inevitable price it had to pay to rapidly curb the spread of the epidemic, which was achieved by restricting the activities of certain industries and limiting the mobility of citizens. At the same time, the state authorities acted equally quickly to mitigate the negative impact of the pandemic on the situation of Polish companies and families. Narodowy Bank Polski also took decisive and pre-emptive steps to support the Polish economy. NBP cut interest rates significantly, including the reference rate to 0.1%, and launched the purchase of bonds issued and guaranteed by the State Treasury. In this way, NBP mitigated the negative impact of the pandemic on the financial situation of indebted households and enterprises, as its actions translated into smaller loan instalments. Moreover, NBP purchased bonds with a value of almost PLN 113 billion at purchase prices. By purchasing these securities, NBP contributed to a reduction in bond yields, which strengthened the impact of the monetary easing on the economy, and at the same time increased the fiscal space for the implementation of the government’s anti-crisis measures.
Thanks to the economic policy measures taken by the state, as well as the extraordinary ability of Polish entrepreneurs to adapt to difficult conditions, the effects of the pandemic shock in Poland were exceptionally mild. The decline in GDP in the second quarter of 2020 in Poland was smaller than in the vast majority of the other European economies. Moreover, in the third quarter of 2020, we experienced a marked recovery in economic activity, which proves that the appropriate response of economic policy helped to prevent the shock from having a long-term negative impact on the economy.
From today’s perspective, do you believe that NBP’s reaction to the crisis was adequate?
I have no doubt that our response was appropriate. This is confirmed by many world experts, and Kristalina Georgieva, the head of the International Monetary Fund, openly admitted in an interview with journalists that NBP had taken the right direction. As I mentioned, NBP reacted very quickly to the risks associated with the pandemic and took steps to mitigate the effects of this shock on the economy. And today we can say with full conviction that our actions proved to be effective. First of all, the reduction in interest rates fully translated into lower interest rates on loans. And let us remember that this concerns not only new loans, but also those taken out before the pandemic. And lower interest rates on loans means lower loan instalments, which Polish families and companies have felt in their wallets. It also reduced the risk of insolvency of many companies, which could have had serious repercussions on the labour market and future economic growth. Secondly, the yields on government bonds have also dropped significantly, thanks to which taxpayers will pay less for the government’s measures taken in response to the pandemic. In short, as a result of the easing of NBP’s monetary policy the 2020 recession was much less severe. These measures will also boost Polish GDP growth in 2021. Our experts estimate that in these two years total GDP will be 1.4 percentage points higher thanks to our actions. That’s a lot. Monetary policy easing also helped to reduce the risk of inflation dropping below the NBP target, which would be very unfavourable for our economy. So there is no doubt that our response to the pandemic was appropriate and immediate.
Returning to the current economic situation, in the third quarter of 2020 it seemed that the worst was over. Has the resurgence of new infections in October and November changed that assessment?
In economic terms, I still believe the worst is over, but the second wave of the coronavirus pandemic has held back the earlier recovery and increased uncertainty. Fortunately, its consequences were not as disastrous as those we faced in spring 2020. And this is despite the fact that in terms of epidemics, autumn 2020 turned out to be much more difficult. This is partly because although the intensification of the epidemic forced the government to tighten restrictions again, it was possible to avoid a lockdown in many sectors, and some entrepreneurs adapted their activities to the prevailing conditions. At the same time, NBP continued its earlier activities ensuring low financing costs. As a result, in the fourth quarter – as suggested by the available data – the Polish economy did not suffer as much as in the first wave. For while the situation in the service sector has worsened again, industry has been doing well so far. Overall, however, in the fourth quarter of 2020 we will probably see a larger drop in GDP in annual terms, although this decline will be clearly smaller than in the second quarter of 2020.
Is it precisely this resilience of the Polish economy that is behind the recently observed pressure on złoty appreciation? Is it true that NBP has recently intervened in the currency market?
The lack of a clear and lasting adjustment of the złoty exchange rate to the global shock and NBP’s monetary policy easing is partly a sign of a positive assessment of the Polish economy by investors. But it is also related to the fact that the major central banks continue to ease their monetary policy significantly by purchasing assets on a larger scale than NBP does, by increasing liquidity and by announcing they will maintain low or even negative rates for the next several years. This creates conditions for asset price increases on a global scale, as recently seen in many markets, including the currency market. Let us remember that for an economy like ours the exchange rate is an important determinant of the overall tightness of monetary conditions and a shock absorber. In 2008 and at the beginning of 2009, in response to the global financial crisis, the złoty depreciated significantly, which, alongside the automatic stabilizers in fiscal policy, was the most important factor that allowed Poland to avoid recession – the only country in the EU to do so. In 2020, we experienced a recession, which required NBP to significantly ease its monetary policy. At the same time, the złoty weakened only temporarily, and to a limited extent, so that ultimately the real effective exchange rate practically did not change from the level before the pandemic.
In recent months, we have kept interest rates unchanged because there was less space for this, and at the same time we were buying fewer assets. On the other hand, the policy of the major central banks, including the ECB, still involved strong monetary easing. This put pressure on the appreciation of the złoty and the risk of a pro-cyclical strengthening of the exchange rate amid the second wave of the pandemic and persistently high uncertainty about the scale and sustainability of the recovery in the coming quarters.
Let me repeat, the lack of an exchange rate adjustment undermines the natural mechanism that allows economies with floating exchange rate regimes to mitigate the scale of the downturn, provide more opportunities for recovery and limit the risk of an excessive decline in inflation. That is why the growing upward pressure on the value of the Polish złoty that we have observed recently is extremely alarming and very detrimental. It is detrimental as regards the rebound of Poland’s GDP growth and the continuation of export growth. In view of our projection of inflation, which expects inflation to be running at a low level in 2021, this obviously creates the space for possible decisive interventions of the central bank. Therefore, the NBP Management Board has been purchasing foreign currencies on the FX market since mid-December 2020 in order to strengthen the impact of NBP’s monetary policy easing on the economy.
In December the number of Covid-19 cases dropped and vaccinations began at the end of the year. At the same time, there is a chance that after 17 January 2021 the pandemic restrictions will start to be lifted. So, can we expect that 2021 will bring an improvement in the economic situation?
We will not return to normal from one day to the next, but we can assume that the impact of the epidemic on the economy will gradually weaken. Hopes for this to happen are boosted by the start of vaccinations and the adaptation of society to living in the conditions of the pandemic. And if the impact of the pandemic on the economy diminishes significantly, there is a good chance that 2021 will bring an improvement in the economic situation. This scenario is suggested by our forecasts, according to which in 2021 we will see a gradual recovery in economic activity. Importantly, the economic recovery will be accompanied by moderate inflation, which, according to forecasts, will be in line with the NBP target. It should be remembered that regulatory factors, in the form of negative supply shocks, namely an increase in energy prices and prices of waste disposal, will put upward pressure on inflation. Without them, price growth would be significantly lower. In short, the baseline scenario for 2021 is a gradual economic recovery and inflation running in line with the NBP target. I hope such a scenario will materialize, but 2020 reminded us that the course of the epidemic and thus also economic developments are not easy to predict. In such a situation, it may take us longer than we anticipate to get the economy back to normal. This, in turn, would also create the risk of price growth dropping below the inflation target, which in the current macroeconomic situation would be another unfavourable factor for the economy.
Taking into account the outlook for the economic situation and inflation that you have outlined, does NBP plan to further ease monetary policy?
From today’s perspective, the current level of interest rates is appropriate and best suits the current situation. However, in the first quarter of 2021 interest rates may be cut further. Therefore, NBP is conducting the necessary analyses of the possible circumstances and potential effects of such an interest rate cut. If the pandemic and the economic situation develop in line with the baseline scenario, i.e. the epidemic situation stabilizes and the economic situation gradually improves, there should be no need to change the parameters of monetary policy in the coming quarters. However, should the Polish economic situation be affected by negative factors, creating the risk of inflation falling below the target, we cannot rule out the need of a more decisive monetary policy response. For example, in the event of a third wave of the pandemic in the winter months, it would be possible to further lower interest rates in the first quarter of 2021. In short, with the current high level of uncertainty about the future economic situation, nothing is a foregone conclusion and we should be ready for various scenarios. I believe that with the release of the March projection of inflation and GDP, we will know more about the epidemic situation and economic outlook, which will also enable us to better assess further monetary policy measures.
Do these analyses also take into account the impact of a potential interest rate cut on the banking sector? Such a decision would certainly pose an additional challenge for banks.
I would like to comment on the constantly repeated argument that interest rate cuts mean that banks’ financial condition will deteriorate. It is true that lowering interest rates from their already low level may translate, with other conditions unchanged, into a short-term decline in banks’ interest income. Yet, it is not true that other conditions remain unchanged. Interest rate cuts also affect the macroeconomic conditions, which have a significant impact on the performance of banks. First of all, interest rate cuts have a positive effect on the domestic economic situation and, consequently, on banks themselves, whose situation largely depends on the condition of borrowers. Thus, abstaining from interest rate cuts in the event of a marked deterioration of the economic outlook would do a disservice to banks. It should also be emphasized that interest rate cuts directly reduce the credit risk incurred by banks, easing the burden on the income of borrowers in the form of interest payments. The interest rate cuts implemented so far in 2020 have left up to PLN 7 billion in the wallets of banks’ clients in annual terms. At the same time, I should emphasize that NBP’s decisions are not and cannot be limited by their possible impact on the financial results of one sector. We should keep in mind that the pandemic-driven recession has affected the financial condition of many Polish companies and families. And NBP’s task was to mitigate this negative impact, so as to prevent the sluggish economic activity from increasing the risk of an excessive fall in inflation. Of course, what NBP must take into account is the stability of the banking sector. But from this point of view, it is not only the current results of banks that count, but above all their ability to absorb losses and provide lending. In this respect, our estimates indicate that the banking sector has adequate capital to continue to operate soundly even in a much worse scenario than we currently assume.
Last year was very difficult for many Polish companies. But can something positive come out of these hard experiences?
President Roosevelt reportedly once said that, “a smooth sea never made a skilled sailor.” With windless weather at sea, it is impossible to gain the skills and experience necessary in a storm. Likewise, operating in favourable and stable economic conditions rarely allows you to prepare for more difficult times. Unfortunately, such times are bound to come sooner or later as unexpected shocks are an inherent feature of the economy. The challenges faced in periods of recession often trigger creativity and dynamism, which allow many economic agents to adapt to the changed conditions. I believe that the measures introduced in response to the crisis, as well as the innovations of many companies and the knowledge and experience gained during this period, will also yield benefits long after the pandemic is over.
NBP has recently become very much involved in the promotion of the National Cash Security Strategy. The pandemic is a powerful shock for economic agents. It was reflected, among others, in growing demand for cash among citizens. Demand for this type of payment is still high in many European countries, such as Germany. What measures is Narodowy Bank Polski planning to take to ensure cash security in 2021?
The safety of cash transactions will be one of the priorities of our work in 2021. The pandemic has revealed how important it is to maintain general acceptance and availability of cash, as the freedom to use it is one of our civil liberties. Banknotes and coins, whose sole issuer is Narodowy Bank Polski, are legal tender in Poland. Meanwhile, according to our research conducted in 2020, during the pandemic as many as 9 per cent of customers were refused cash payment in everyday transactions. Poland was, is and will be a country of cash – at the end of 2020, the value of cash in circulation exceeded PLN 321 billion. This means an increase in the value of banknotes and coins in circulation by almost 35 per cent compared to 2019. Narodowy Bank Polski simply does what Polish citizens expect it to do – it provides them with wide and safe access to cash.
Interview by Maciej Danielewicz, Editor-in-Chief of Obserwator Finansowy
See: Interview with the Governor of NBP summing up the year 2020 for Obserwator Finansowy
Text by Governor of NBP, Prof. Adam Glapiński, for the “Polski Kompas 2020” annual
NBP actively supports the Polish economy during the pandemic
Narodowy Bank Polski has taken decisive, early action, while supporting the protective measures imposed by the government in the face of the pandemic. As a result, it was possible to avoid “the worst case scenario”. At the same time, the outlook for the Polish economy looks very good against the backdrop of other economies.
Mervyn King, erstwhile Governor of the Bank of England, said in 2000 that central banks should pursue their monetary policy in a “boring” manner. By that he meant that the monetary policy – so as to best serve the aims of preserving macroeconomic stability and keeping inflation low – should be followed according to predefined and tried-and-tested rules and with the use of standard instruments.
The experience gained by Narodowy Bank Polski before the pandemic proves that following a conventional and conservative monetary policy is an effective means of accomplishing the objectives pursued by a central bank in normal times. Before the outbreak of the pandemic, NBP held the reference rate at an unchanged level of 1.5% for five years, and so inflation stayed around NBP’s inflation target and rapid, though sustainable, economic growth could be maintained. As a result, the growth in Poland was based on sound foundations, and the Polish economy was well prepared for the more difficult times ahead.
However, the unprecedented nature of the events that took place in the first half of 2020, surrounding the COVID-19 pandemic, required that NBP reach for monetary policy tools not yet used by the Polish central bank, though used by other banks following the global financial crisis. This is because the outbreak of the COVID-19 pandemic led to the biggest global recession for decades and a clear restriction of the economic activity in Poland, which entailed the risk of inflation falling below NBP’s inflation target in the following years. NBP therefore had to stand on the frontline of the fight for mitigating the negative economic consequences of the pandemic.
At the onset of the pandemic, i.e. in mid-March, no one had any data yet on the impact it exerted on the economy. It could, however, be expected that the pandemic would hit Polish enterprises and households through direct restrictions on the functioning of some industries and sectors (among others, gastronomy, education, culture, transport or tourism), a massive increase in uncertainty, and a decrease in revenues, as well as a clear contraction in foreign demand for Polish goods and services.
As a result, it could be expected that a deep recession would hit and a wave of bankruptcies and strong rise in unemployment would ensue, unless adequate protective action was taken as part of national economic policy. From the point of view of a central bank, whose primary statutory objective is to maintain price stability, it was significant that there was a risk of inflation dropping below the inflation target in the medium term, and the risk was linked to a potentially deep recession and its secondary effects later on.
Therefore, NBP’s greatest challenge was to act swiftly in order to buffer the economic consequences of the pandemic, while at the same time preventing these from strengthening and creating conditions for a faster recovery in the economic activity in the following quarters. At the beginning, it became essential to maintain liquidity in the temporarily “frozen” economy. Because of the restrictions on conducting business activity and a severe reduction in demand, many enterprises could lose liquidity and would, as a result, have to cease their activities and dismiss their workforce, which might even further reduce revenues in the economy and curb demand. In such an event, the Polish economy would not quickly get back on its previous track having been “unfrozen”.
In view of the above, Narodowy Bank Polski – as one of the first central banks in Europe – took anticipative action to address the expected deterioration in the economic situation and already in mid-March it introduced decisive measures in order to ease the monetary policy and mitigate the crisis. Firstly, since 17 March, the Monetary Policy Council has cut the reference rate three times, by 1.4 percentage points in total, to the level of 0.10%. Secondly, NBP launched structural open market operations aimed at purchasing government securities and government-guaranteed debt securities on the secondary market. Thirdly, in March, the Monetary Policy Council decided to decrease the required reserve ratio by 3 percentage points, to the level of 0.5%, and at the same time, the Financial Stability Committee recommended releasing the systemic risk buffer for banks, which was set at 3%.
The said measures adopted by NBP all had a common denominator, and that was to support Polish entrepreneurs and households in the crisis. Through these measures, NBP reduced the risk of inflation dropping below NBP’s inflation target in the medium term. Here, we can point to three main channels through which the monetary policy pursued by NBP has influenced the Polish economy.
Firstly, the easing of NBP’s monetary policy has contributed to lowering interest rates on loans granted to households and enterprises, thereby reducing repayment instalments. It may be estimated that cutting the NBP interest rates since March this year will contribute to reducing the burden on households and enterprises on account of interest on the existing loans by nearly PLN 7 billion annually. It is substantial support for the financial situation and sentiment of indebted business entities.
Secondly, the easing of NBP’s monetary policy has enabled smooth implementation and financing of the protective measures imposed by the government, thus providing Polish families and enterprises with direct financial support. The asset purchases launched by NBP – by the end of August 2020, NBP purchased securities with a par value of PLN 103.3 billion – helped to maintain the liquidity of the Treasury bond market, and, consequently, facilitated the placement of additional bonds by the Ministry of Finance, Bank Gospodarstwa Krajowego, and the Polish Development Fund in the market. At the same time, the costs of financing the protective measures adopted by the government have been cut efficiently, as there has been a substantial decline in Treasury bond yields. This, in turn, will result in markedly lower costs of servicing the public debt.
Thirdly, the steps taken by NBP, including Treasury bond purchases and decreasing the required reserve ratio for banks, along with the recommendation from the Financial Stability Committee to release the systemic risk buffer set at 3%, have all made a vital contribution to increased bank lending. As a result, banks now lack neither liquid funds nor capital to provide Polish enterprises and households with access to credit. Furthermore, NBP offered bill discount credit to banks enabling them to obtain low-cost refinancing of loans extended to enterprises.
NBP has thus undertaken decisive and early intervention measures, while supporting the protective measures imposed by the government in the face of the pandemic. As a result, it was possible to avoid “the worst case scenario”. At the same time, the outlook for the Polish economy looks very good against the backdrop of other economies. Obviously, this is not only due to the central bank’s and the government’s response to the pandemic, but also to the strong fundamentals of the Polish economy laid down in the years before the pandemic, and most of all – to the entrepreneurship and diligence of Polish citizens
Finally, it has to be pointed out that the adequate response of the central bank to the current pandemic shock would not have been possible if Poland was in the Eurozone. In such a case, the monetary conditions in Poland would be shaped by the decisions of the European Central Bank, adopted de facto on the basis of the situation in the largest economies of the Eurozone. As a result, the monetary policy response would not be fully dovetailed with the macroeconomic processes taking place in Poland in terms of its scale and the time of its implementation.
The latest data on the Polish economy give reasons to look into the future with cautious optimism. The data indicate that the return of the Polish economy to growth may be faster than it was previously thought. At the same time, forecasts say that in 2020 Poland is standing a chance to achieve the highest economic performance in Europe with inflation kept at a level compliant with NBP’s inflation target. It speaks very well for the anti-crisis action taken by Narodowy Bank Polski.
However, the struggle against the economic consequences of the pandemic is certainly not over yet. It will surely take some time for the economy to recover and heal completely. NBP therefore remains ready to undertake further anti-crisis measures, where the implementation of the central bank’s objectives and the Polish economy so require.
Regardless of how the situation develops further, I can assure all entrepreneurs and Polish families that NBP will continue to maintain price stability and enhance sustainable economic growth and thus – lay the foundations for maintaining the Polish economic success.
The text was published in the sixth edition of the “Polski Kompas” annual, issued by the editorial board of the “Gazeta Bankowa” monthly.
Interview with Professor A. Glapiński, Governor of NBP in the quarterly “Apostoł Miłosierdzia Bożego”
We have to serve the highest values
On the difference between God’s economy and human economy,
the institution of a bank, and the obligation to multiply our talents
– a conversation between Professor Adam Glapiński, the Governor of NBP,
and Father Jarosław Rodzik SAC
Dear Mister Governor, when priests want to encourage the faithful to pay more attention to their own salvation, they sometimes speak of the difference between the human economy and God’s economy. So, how is it actually? Which one is more important?
This is a very important question. We should recognize, however, that these notions are incomparable. God’s economy is governed by laws that are only known to God, although people should strive to learn about them and to understand them. The Parable of the Labourers in the Vineyard is one of those stories that could illuminate the concept of God’s economy. Each of the workers received the same pay regardless of how much time they spent working. In human economy we would demand some distinction to be made. The easiest answer, however, is that God’s economy requires people to work on themselves.
I would also introduce an additional notion of private economy, understood as finding your right path in life. We should first find in ourselves the features of our own vocation. We should answer the question of what we should be doing for the good of others. This is the path towards God’s economy, which is guided by a different set of principles than human economy. As a university teacher and a professor of economics I’ve always sought the traces of this unique vocation in science, literature, and culture. While I sometimes joke that I chose economics by accident, in reality these studies fascinated me also because they allowed me to gain a better understanding of the mechanisms governing human decision-making.
This question also has a hidden agenda – the difference between the temporal and the eternal homeland. In his lecture on “the last things of man”, contained in the Letter of Paul to the Philippians 3:1-4:1, St. Paul makes the following statement: “Our citizenship is in heaven.” This is putting the matter on a knife-edge…
As a believer, I recognize that every human action should be oriented towards a confirmation of these words: “Our citizenship is in heaven.” And this means that we have to serve the highest values. Putting this in terms more relevant to everyday life, this means working on ourselves for the common good, as mentioned previously.
In economics textbooks we don’t encounter concepts such as the original sin or human selfishness. Meanwhile, they remain intricately linked to our thinking and our activities. They almost entirely define our human nature. In your opinion, what (or who) makes us reluctant to confront these notions not only in the sphere of scientific reflection but also in the public debate?
The notion of original sin in the theological understanding is indeed typically absent from the works of economists, although in the metaphorical sense we will probably encounter such a term in the descriptions of mistakes made in the area of financial management. The second notion, “selfishness”, is actually recognized in economics, although it isn’t always referred to in this way. If we were to look, for example, at practices which place the greatest emphasis on maximizing profits at the expense of the common good, then under certain assumptions we would arrive at the concept of selfishness. The reluctance to use clearly defined ethical concepts may have its source, among others, in the narrow specialization of many scientific fields. We should keep in mind that we are living in times in which attempts are being made to redefine many concepts. Economics as a social science primarily focuses on mechanisms, presents the relationships between various phenomena, refers to statistics. Only then certain differences in interpretation can emerge, where we may apply the concepts of ethics and morality.
Before we move on to the institution of the bank, let’s talk about one more story from the Gospels. In the Parable of the Rich Fool (Luke 12: 13-21) Jesus describes a man who is not able to share with others and only cares about his earthly granaries. He criticizes the attitude of gathering things in excess, complacency, the lack of sensitivity to the needs of fellow men, and the refusal to think about the final judgment. How can we reconcile our concern for the “earthly granaries” with the need to invest in our eternal treasures in heaven?
This is another important question, which has a deep theological sense, forcing us to think and act not only in the context of our earthly life. If we were to look at the parable from the point of view of the principles of economics, which I hold dear, then we should indeed multiply goods, take care of the economy, and be able to seize the opportunities for development. But it’s important not to lose the broader perspective and, as they sometimes say in the economic forecasts, to remember about the more “long-term horizon.” Future generations will judge us with regard to our concern for the future using earthly measures, and God will evaluate our work by His own measure of good deeds.
The bank is an institution with long traditions – the beginning of the Renaissance, the 14th century, Italy. Although there are some sources stating that a family-owned Venetian bank began operating as early as in 1156. How can we explain this phenomenon, that merchants, businessmen and ordinary people started flocking to such an innovative form of managing assets and multiplying them?
The desire to accumulate and to increase one’s wealth is as old as human civilization. Already in antiquity, even before the contemporary form of money was developed, there was a need for financial institutions providing the secure storage of goods and valuables. One interesting example is ancient Egypt, which had an entire network of state-owned grain banks. They were used by people to deposit and dispose of grain, that is, an article of strategic importance for the Egyptian economy, which was also used in the payment of remuneration for work.
The period of the Middle Ages lasted for about a thousand years, and therefore it was not uniform in terms of economic developments. After the fall of the Western Roman Empire in 476 AD, large parts of Europe experienced economic decline. The importance of long-distance trade decreased significantly. The people reverted to some extent to the natural economy, that is, one in which there is no need for money in the form of coins or banknotes. Such conditions were not conducive to the development of banking.
However, over time the European countries gradually rebuilt their international trade relations. Starting from the 11th century, Italian cities – which experienced rapid development as a result of Mediterranean trade – became the most important centres of economic activity. This benefited the merchants, who were among the financial elite of Medieval European society. They controlled substantial amounts of money, which made it possible for them to get involved in more complex financial activities. They established private banking houses, some of which operated in many countries simultaneously. This was a very lucrative business. However, for the merchants of that time, security was as important as the profits derived from their activities. The development of banking allowed for cashless settlement of large transactions, eliminating the necessity of carrying coins over long distances. This was a very important innovation. Europe entered the Modern Era with a somewhat well-developed financial infrastructure, which gradually gave rise to the forms of banking existing until today.
The etymology of the word “bank” is also interesting. It derives from the French word banque and the Italian word banco, which refer to the benches, tables, or counters used by the Italian goldsmiths and traders involved in the transfer of metallic coins between customers. Could it be argued that these transactions were based on mutual trust?
Looking from a broad historical perspective, we could point out that even in ancient Mesopotamia people were using certain simplified loan-like mechanisms (and were therefore involved in quasi-banking activities). The first institutions resembling today’s banks – taking deposits and providing loans – operated and successfully developed in the ancient civilizations of Babylon, Greece, and Rome. Along with the collapse of the classical culture, banks faded into oblivion, but the concept of such institutions resurfaced in the Middle Ages. Due to the development of the Medieval monetary and commodity system, the wealthier merchants started performing the functions of banks. They didn’t want to risk involvement in dangerous trade expeditions and decided to multiply their wealth by lending money to others at a very high interest. Along with the expansion of trade and the necessity of exchanging different currencies, the role of Medieval currency exchange offices was assumed by the money traders and goldsmiths. They also offered the settlement of payment orders to third parties. Money inevitably became the glue that strengthened the relationships between the lender and the borrower, between the bank and the client. This relationship had to be based on trust.
Institutions that most resembled contemporary banks were created in the late 14th century in northern Italy – Genoa, Venice, and Milan. Like the goldsmiths and money traders of the previous time periods, they took in deposits and issued promissory notes in return, and they also granted loans. However, these institutions were already organized in larger networks and operated in various cities or countries, sometimes located far away from each other. In this way the banks were creating a new quality in the relations with the borrowers and the depositors. Thanks to the ties within such networks, a customer who deposited money, for example, in Genoa, could withdraw money in Milan on the basis of the received promissory note. This eliminated the potential risks associated with carrying money over long distances. However, the promissory notes issued by the bankers were only worth anything as long as the clients trusted them and were certain that they would get their money back after submitting these documents. It sometimes happened that customers demonstrated their “undermined” confidence by demolishing the headquarters of a given bank, for example, by breaking the banking bench. This was also a warning signal to other customers that the bank had lost its liquidity and credibility. Over time, such negative experiences led to the development of systemic solutions aimed at building and strengthening the customers’ confidence in banks. Public guarantees provided to these institutions by the city, and later also by the state, were supposed to increase the security of bank transactions.
In 1790, the Warsaw-based banker Jędrzej Kapostas published a document entitled “Planta ułożenia projektu Banku Narodowego” (“Plans for the establishment of a National Bank”). Unfortunately, the partitions of Poland prevented the implementation of this project. Then came the year 1916 – the creation of Polska Krajowa Kasa Pożyczkowa (the Polish Loan Bank), and the year 1924 – the establishment of Bank Polski Spółka Akcyjna (the Bank of Poland). Could we say that these two institutions gave rise to the banking system of the reborn Polish state?
After the reestablishment of the Polish state in November of 1918, the authorities had to face many challenges – leading the economic reconstruction of the country, pursuing the reform of public finances, and ending the currency chaos. For over 100 years Polish people lived under three separate economic systems of the partitioning powers. As a result, the Polish state needed a new, unified monetary system, a well-organized fiscal and banking administration, and the efficient circulation of its own national currency. However, due to the extremely difficult economic position of the Polish state, it was impossible to quickly stabilize the banking system and the financial and monetary system. for this reason, the Polish government decided to take over Polska Krajowa Kasa Pożyczkowa, which had been established by the German occupation-era authorities. Polska Krajowa Kasa Pożyczkowa was supposed to serve as the central bank and the bank of issue until the launch of Bank Polski SA – the new Polish central bank.
As a result of this decision, the authorities were able to ensure both institutional continuity and the continuity of the Polish central bank’s issuing activity. After Poland regained its independence, the state authorities decided to unify the monetary system on the basis of the Polish mark, that is, the currency issued by Polska Krajowa Kasa Pożyczkowa. The temporary use of the Polish mark was supposed to give the authorities the time necessary to prepare a full currency reform. In this sense, the banking and issuing activity of Polska Krajowa Kasa Pożyczkowa served as a bridge to the full restoration of the Polish state finances, and as a necessary stage on the path to the establishment of a strong and stable banking system. This new system was based on Bank Polski SA, which was launched at the end of April 1924. It was created as part of the currency and fiscal reform of Władysław Grabski. Bank Polski SA operated as a joint stock company with a share capital of 100 million złoty and its shares were held by private individuals, businesses, various institutions, and banks. The State Treasury initially controlled a 1 per cent stake, which guaranteed that the bank was an institution fully independent from the government. It primarily served the function of the bank of issue and the bank of banks. Bank Polski SA undoubtedly constituted the foundation of the banking system in the newly reborn Polish republic and served an important role in the struggle to maintain the position of the Polish currency. Meanwhile, a stable Polish złoty was one of the key elements of the economic sovereignty of the state.
Before we conclude this historical thread, I would like to ask you about Władysław Grabski and his contribution to the institution that you are currently heading. I’m mentioning Grabski in order to highlight that it is possible to combine human genius with deep concern for the Polish state…
It's no accident that Władysław Grabski is primarily mentioned as a figure representing the Polish economic reconstruction after the First World War. He not only possessed all the formal qualifications necessary to hold the highest offices in the state, but through his actions he also exemplified a truly pro-state attitude. He was not afraid to take personal responsibility for his decisions and he defended his views regardless of the circumstances. Grabski believed that the restoration of a strong national currency with centuries-old tradition should be something more than just a symbolic gesture. He believed that the Polish złoty, reborn in 1924, should also provide the economic foundation for the citizens’ trust in the state. That it should enable successful development in the following years. This was particularly important in the context of the recent hyperinflation, which consumed the Polish mark in 1923 and had a very negative effect on public sentiment. Concern about the stability of the new currency was the primary objective of Bank Polski SA, whose establishment was so tirelessly pursued by Grabski. It’s worth recalling that this institution was the immediate predecessor of Narodowy Bank Polski, and the ideas that guided its activities, are also being reflected in more recent times. The redenomination carried out in Poland in 1995 could be seen as a symbolic rebirth of the Polish złoty in the conditions of a free market economy. In 1997 Narodowy Bank Polski acquired its present institutional shape. Since then, Poland has had numerous economic achievements, and the stable position of the Polish złoty has certainly contributed to that success. Władysław Grabski once said that “a healthy and strong currency is the foundation of the healthy development of economic life and the strength of state financing.” These words have lost none of their relevance.
On the website of NBP, we read the following statement: “Narodowy Bank Polski is the central bank of the Republic of Poland. Its tasks are stipulated in the Constitution of the Republic of Poland, the Act on Narodowy Bank Polski, and the Banking Act.” Could you please explain to our readers what the precise meaning of these somewhat complex provisions is?
Narodowy Bank Polski is the central bank, in other words, it is the most important bank in Poland. Our motto is: “We protect the value of money.” This is due to the statutory provision that the primary task of NBP is to maintain price stability. The objective of NBP is to stabilize the inflation rate at the level of 2.5 percent, with a permissible fluctuation band of +/- 1 percentage point. This is in line with the “Monetary Policy Strategy beyond 2003”, which was developed by the Monetary Policy Council. We are responsible for the stability of the national currency, the Polish złoty. We manage foreign exchange reserves and thus we also ensure the appropriate level of financial security of the Polish state. We are the issuing bank of the Polish złoty, so we secure the liquidity of cash transactions. One important objective of NBP is also promoting the stability of the financial system. We care about the liquidity, efficiency, and security of the payments system. We also popularize economic knowledge. The work of analysts and experts employed at NBP is focused on these goals.
On the NBP website, we also find the following provision: “NBP fulfils three basic functions: the issuing bank, the bank of banks, and the central bank of the state.” The legislator has provided this institution with a great degree of independence. What are the arguments in favour of such legal regulations?
It's worth quoting a part of the Act on Narodowy Bank Polski: “The basic objective of the activity of NBP shall be to maintain price stability, while supporting the economic policy of the Government, insofar as this does not constrain the pursuit of the basic objective of NBP.” This sentence lays out the main objective: “maintaining price stability”, but also the responsibility for our country: “while supporting the economic policy of the Government”, with the important stipulation that the support for the economy cannot constrain the pursuit of the bank’s basic objective. It is extremely important to ensure that our national currency – the Polish złoty – retains its value. Let's keep in mind that the independence of the central bank is in reality a huge responsibility towards the state, to the citizens, and not some sort of unchecked privilege, as one might naively believe. A state can only thrive if it has an efficiently operating independent central bank.
I would also like to ask you about the role of the state in economic life. How can we reconcile the two classical approaches to this issue – state interventionism (proposed by John Maynard Keynes) and the free-market, liberal approach (represented by Friedrich August von Hayek or Ludwig von Mises)? Is there any effective alternative or a third way?
As is often the case in such debates, the truth lies somewhere in the middle. On the one hand, the experience of socialism has clearly shown that excessive state intervention in the economy has negative consequences. On the other hand, it would be impossible to find a single country whose economy is solely based on market mechanisms. There is no doubt that the appropriate solution lies somewhere in the middle between these two extreme options, and that the functioning of the free market should be complemented with an appropriate economic policy of the state. However, there is no consensus with regards to the scope of such intervention. Individual countries differ significantly in terms of the areas of state activity, which is reflected in the large differences in the scale of public spending. For example, in countries such as Chile, South Korea, and Switzerland, where the retirement pension systems, health care and education have a significant private component, the level of state expenditure is significantly lower than in France, Finland, and Belgium, where these services are mainly financed with public funds.
Despite differences in the views on the necessary scale of interventionism, in some cases, there is no doubt that an economic policy response is necessary. The current situation caused by the COVID-19 pandemic is certainly such a case. In the current conditions an intervention on the part of economic policy was necessary in order to mitigate the impact of the pandemic on the financial situation of companies and – consequently – on the labour market. I’m saying this despite the fact that, in principle, I am opposed to rescuing unprofitable enterprises using public funds. In normal conditions such measures reduce the incentive for more effective management and block the flow of resources in the economy. However, in the current situation strong assistance from the state was fully justified. In this crisis, even healthy companies were at risk of bankruptcy, as entire sectors of economic activity were forced to shut down. Meanwhile, the collapse of numerous companies would have had dramatic consequences – it would have reduced the potential of the economy for many years and would have caused a long-term increase in unemployment. This is why it was necessary to support businesses and households, primarily through fiscal policy measures. That is why all the governments that had the required fiscal space decided to provide such support. At the same time, monetary policy was also loosened in an unprecedented manner – virtually all the central banks lowered their interest rates, in many cases pushing them down to near-zero levels. Many central banks also launched asset purchase programmes and other operations providing liquidity. The loosening of monetary policy was also particularly important in protecting the economy against the crisis.
Measures aimed at promoting the stability of the domestic financial system are one of the main areas of NBP’s activity. How effectively is the bank able to control these processes during the coronavirus pandemic and the turbulence on stock markets?
The impact of the pandemic on the banking sector must be considered both in the short and medium term. In the short term the key issue was to maintain continuous and unhindered access of the public and the economic entities to money settlements, including both cash and non-cash settlements, and to minimize the risk of liquidity problems in the banking sector. This phase is already behind us and I can say with satisfaction that we successfully tackled this challenge. As we all remember, the demand for cash increased in an unprecedented way – by about 60 billion PLN from the beginning of the year until today, that is, by more than 25 percent. But because we ensured an adequate supply of banknotes, this demand was met fully and in a timely manner.
NBP also ensured the adequate liquidity of banks, so that non-cash settlements could also be carried out smoothly – this was done through repo operations, a reduction in the required reserve ratio, and the purchase of bonds on the secondary market. Moreover, we enabled the banks to refinance loans to enterprises by introducing the so-called “bill discount credit.” In this way banks were granted the possibility of obtaining additional liquidity, which in itself had a psychological effect and contributed to a decrease in uncertainty. The liquidity position of the banks is very good anyway, so in practice they don’t need to use many of the instruments that we are offering.
One important challenge in the medium term will be to make sure that the banks are able to deal with the higher costs of credit risk and to continue lending to the economy. The Monetary Policy Council also took this aspect into account when it decided to cut interest rates by a total of 1.4 percentage points. The reduction of interest rates by NBP, along with other protective measures introduced by the public institutions, significantly reduced the threat to the situation of borrowers and is therefore conducive to a relative improvement in the loan repayment rates. The banks themselves don’t seem to fully appreciate this aspect of NBP’s decision to reduce the price of money. Instead they are focusing on the impact on their interest margins. I’m afraid that this is indicative of a short-sighted approach to these assessments. Over time, the importance of credit risk and the costs associated with it will grow, and thus the banks will gradually come to appreciate all the measures aimed at reducing these costs. As a result, they will ultimately see the net impact of the interest rate cuts on their situation as positive.
I would also like to remind that, as the Chairman of the Financial Stability Committee in its capacity as the macro-prudential supervision authority (KSF-M), I initiated the abolition of the so-called systemic risk buffer, amounting to 3 percent, which freed up about PLN 30 billion of capital for the banks. This is a huge safety cushion which can be used by the banks for the purpose of absorbing any potential losses and also for the purpose of lending to the economy. We also recommended the reduction of risk weights for certain loans to companies in order to stimulate lending. As a result, there are currently no capital constraints on lending.
As the central bank we have therefore reduced the risks to financial stability, both in terms of the capital and the liquidity of the banking sector, as well as in terms of the situation of borrowers, or more broadly, in terms of economic growth. These measures were taken in a quick and efficient manner and on a significant scale. We could say that now it’s time for banks to act, and I hope that they will not unduly restrict their lending to the real economy, while exercising the necessary caution.
It may not be very scientific, but it’s very existential – as the old saying goes, “charity begins at home”. I would therefore like to ask you whether our economy will survive the inevitable crisis?
The COVID-19 pandemic is certainly one of the biggest challenges that the world economy has faced in recent decades. Firstly, because we were dealing with a sudden shutdown of certain business activities in many economies at the same time. Secondly, it caused an unprecedented increase in uncertainty. Together with the introduced restrictions, this led to a sharp economic downturn. Finally, it was difficult to predict the further path of the pandemic and its impact on the behaviour of consumers and businesses.
Fortunately, Poland was well-prepared for the current challenges. Our economy is characterized by a high degree of flexibility and a strong entrepreneurial spirit, which is reflected, among others, in the ability of Polish companies to adapt to the changing conditions. Moreover, we are not as dependent on the tourism sector, as some European countries, and the structure of our economy is highly diversified. Our economy entered the pandemic with a relatively high rate of economic growth, but without significant macroeconomic imbalances. We had low unemployment, a foreign trade surplus, and the deficit of the public finance sector was small. As a result, the state was able to undertake decisive action, which limited the negative impact of the pandemic on the Polish economy. A large fiscal stimulus programme was introduced, aimed at supporting the financial situation of enterprises and protecting jobs. At the same time NBP loosened its monetary policy, which improved the financial situation of indebted entities and which supports the return to a path of economic growth.
Recent data show that the measures taken have been effective, and the worst is behind us. The relatively limited increase in unemployment, as well as the rebound in industrial production and retail sales suggest that the Polish economy is quickly making up for the incurred losses. Of course, the effects of the pandemic will be seen in the economy for some time to come, but I have no doubt that we will emerge from the pandemic shock in a much stronger condition than many other countries.
On the NBP website we also find the following provisions: “The Governor of NBP is appointed by the Sejm, at the request of the President of the Republic of Poland, for a term of six years. The NBP Governor is responsible for the organization and functioning of Narodowy Bank Polski.” One the one hand, there is the comfort of independence, but on the other hand, the scale of challenges is enormous…
Independence is assigned to the institution of the central bank, and not to an individual. As the Governor of NBP I’m fully aware of the challenges and the associated responsibility. I’ve been heading NBP since 2016, and before that I served as a member of the Monetary Policy Council. I was familiar with the functioning of NBP when it was headed by the late Sławomir S. Skrzypek. Heading such an important institution, anchored in the Constitution, requires humility. We also shouldn’t forget that NBP is the people who work at this institution for the benefit of the Polish state. These are all exceptional, high-class specialists and because of that it is easier for us to cope with the numerous challenges.
Let us conclude by going back to the Gospels and to Jesus’ Parable of the Talents (Matthew 25:14–30). This is a parable about a wealthy man who was going on a long journey and therefore gathered his servants and entrusted his property to them. Jesus’ criticism is directed at those who are lazy and unreliable. At the same time, He praises the courageous and the creative. Each of us is a servant, receiving generous gifts from God. Could you please encourage our readers to try and multiply their talents...?
This is one of the parables, which can be interpreted directly in the context of economics and banking. After all, the talents mentioned in the story are a currency, and the master entrusts his money before embarking on his journey in the belief that the money will not only be kept safe with them, but that they will generate an appropriate profit. We see this as an investment. This is true in the case of the first and the second servant. They multiplied the wealth of their master and they are rewarded for it. The third servant buried the money he received, and while he returned it to his master, it came without the expected profit. Unfortunately, he will be punished for these actions. So, what should he have done? Let us refer to the Gospel: “You should have put my money on deposit with the bankers, so that when I returned, I would have received it back with interest.” If we were to stick to this “financial” interpretation of the parable, we could conclude that one of the tasks of human beings is also to multiply their wealth, and even use banks. After all, the word “banker” is mentioned in the story. We cannot forget, however, that while the parable refers to concepts that are well understood by the listeners, and appeals to our imagination, the actual meaning behind Jesus’ words is much deeper. We should remember about the aforementioned concept of God’s economy, which is governed by a different set of rules.
The Parable of the Talents is often interpreted as an obligation for people to develop their skills. In a certain sense this influences the contemporary understanding of the word “talent” in the Polish language. In relation to banking, we should point to the broad context of ethics: the master’s trust towards his servants; the responsibility of the two servants for the entrusted money, and, as we assume, the proper management of this wealth; awareness of the objectives and mutual expectations. The two servants understood this well. The third one, referred to as “wicked and lazy” did not make any effort, and did not work on his skills.
And when it comes to a broader interpretation, I believe we should definitely strive to develop our talents. We live in a society based on knowledge, on skills perfected through continuous development. We must remember, however, that development is not limited to technology. Long-term, sustainable economic development is not possible without deep spiritual development, without conscious moral and ethical foundations. Narodowy Bank Polski, which I have been heading since 2016, puts great emphasis on increasing knowledge in the field of economics. We conduct many programmes supporting education in this area, we provide financial support for activities and projects dedicated to schools, as well as many institutions. You could say that we are trying to multiply the aforementioned talents both in the financial sense of the word and in the sense of developing skills. We base our activity on the belief that Poland will become stronger along with the increasing level of economic knowledge among Polish citizens.
Thank you for the conversation.
An interview was published in the quarterly “Apostoł Miłosierdzia Bożego” No 4 (108) 2020.
Article of the Governor of NBP, Professor Adam Glapiński in Dziennik Gazeta Prawna
NBP mitigates the impact of the pandemic
The present situation is a challenge for all of us. I deeply believe that yet again Poles will prove that in difficult moments, they can engage and together take the right course of action. The responsible attitude of all those who have limited their social contacts and observe the administrative recommendations related to the pandemic allows us to hope that we will emerge stronger from this experience. Today, doctors and healthcare professionals are on the front line, protecting the health and life of Poles. Another significant group is the employees of enterprises thanks to whom we have supplies of food and other basic necessities. The silent heroes include those who are taking care of children or supporting the elderly and the disabled. Finally, respect is owed to all hard-working Poles struggling with many difficulties that a few weeks ago nobody could have foreseen.
The central bank is doing its job
Although some people may not notice it, Narodowy Bank Polski is also undertaking many activities aimed at mitigating the economic problems resulting from the pandemic. Firstly, we are ensuring the smooth operation of the payment system, which is the fundamental to the functioning of the economy at large. Secondly, we are supplying Poles with cash, for which there is more demand in times of uncertainty. Thirdly, we are implementing a radical loosening of monetary policy, which will reduce the risk of the pandemic and the ensuing global recession turning into an economic crisis and wiping out years of work invested in Poland’s economic success. Fourthly and finally, we protect the value of the Polish currency.
At present, there is a lot of uncertainty about the impact of the pandemic on economic activity worldwide and in Poland. Yet there is no doubt that in the short run it will cause a sharp simultaneous fall in GDP in many economies. This cost will be unavoidable, since without incurring it, we would face a much larger number of deaths and an overload of health care systems, something that many countries are now becoming painfully aware of. In effect, we would risk even greater economic losses in the longer run. Yet this does not mean that economic policy can just wait for further developments. On the contrary, it is necessary to undertake pre-emptive measures, alongside appropriately targeted measures to alleviate the adverse effects of the epidemic, prevent payment backlogs, company bankruptcies, employee lay-offs and a permanent reduction of production capacity. Finally, economic policy – and in particular, monetary policy – must avert the risk of deflation, which is detrimental to long-term economic growth and which is already looming on the horizon of the global economy.
Therefore, in many countries, as in Poland, fiscal programmes of considerable scale are being launched to maintain the liquidity of businesses, protect jobs and provide financial support to households that have lost their sources of income. These programmes are the domain of governments and fiscal policy, which must play a major role in mitigating the negative economic effects of the epidemic. At the same time, central banks are taking measures involving a loosening of monetary policy and increasing the liquidity of the banking sector.
Low rates, stable zloty
NBP was one of the first central banks in Europe to respond ahead of the expected deterioration in the economic situation, and started activities in support of the Polish economy as early as mid-March 2020. Very soon we became aware of the challenges that would arise in connection with the pandemic. We also knew that delaying these activities could only increase the losses and increase the need to take even more radical steps in the future.
This is why we promptly cut interest rates twice, by a total of 1 percentage point, which brought the NBP interest rate to a historically low level of 0.5%. This resulted in an immediate reduction in loan instalments and a few billion zloty saved by Polish households and firms.
It is worth noting that despite the interest rate cut, the zloty exchange rate has remained stable, and its slight weakening against the main currencies observed a few weeks ago was exclusively due to the rise in global risk aversion affecting virtually all currencies. Importantly, the improvement in the budgets of indebted households due to the interest rate cut will be long-lasting, unlike the 3-6 month suspension of loan repayments offered by most banks. This is because the latter does not mean its cancellation but only postpones the payment. The reduction in interest rates means lower instalments not only now, but also after the so-called loan holiday is over. This translates into lower operating costs for firms and lower yields on Treasury bonds, and hence savings on the cost of servicing the public debt. This expands the space for funding the governments’ activities aimed at combating the pandemic, including the cost of providing necessary products to the medical services.
Benefits from purchase of securities
NBP has launched a financial asset purchase programme, the first such programme since the beginning of the systemic transition. Over the last month we have been purchasing Treasury bonds in the secondary market as part of structural open market operations. This is entirely in line with the Monetary Policy Guidelines and the central bank’s mandate resulting from the European and national legal frameworks regarding central banks, including the Constitution and the Treaty on the Functioning of the European Union. The purchase of securities is aimed at changing the long-term liquidity structure in the banking sector and preserving the liquidity of the secondary market for these securities. Furthermore, the asset purchases strengthen the impact of the NBP interest rate cuts on the economy. This is because they flatten the so-called yield curve, i.e. the range of Treasury bond yields, which, in the absence of the NBP intervention, would have come under high pressure due to a significant rise in the state’s borrowing needs and high uncertainty. Considering that the yield curve influences, directly or indirectly, the borrowing costs in all sectors – including the margins and interest in bank lending – the purchase of securities prevents the so-called procyclical tightening of financing conditions for all the agents in the economy, including households and firms. Let me make it clear – without the purchase of securities, notwithstanding the NBP interest rate cut, we would be facing a tightening of financing conditions affecting all those involved, which would deepen the decline in demand in the economy, perpetuate the downturn and ultimately lead to an excessive slowing of price growth.
However, let us remember that NBP may not finance public sector entities directly, take possession of their bonds in the primary market or grant them loans. That would contravene not only the Polish law and the Treaty on the Functioning of the European Union, but would also cause loss of confidence in the Polish currency among investors and the general public. Therefore, while making purchases on the market, we must also strive to limit the financial risk and maintain the appropriate quality of the purchased assets.
Billions for the economy
To date, NBP has conducted four asset purchase operations on the secondary market (on 19, 23, 28 March and on 16 April 2020), as a result of which it has provided banks with liquidity amounting to nearly PLN 55bn. At the same time, on 17 March 2020 NBP reduced the required reserve ratio from 3.5% to 0.5%, allowing for another PLN 42bn of bank liquidity to be released at the end of the month. In sum, NBP’s activities have provided banks with close to PLN 100bn. It doesn’t end there, though, as the purchase of securities in the secondary market will continue, and the list of eligible securities is expanded from tender to tender. What is more, in line with the decision of the Monetary Policy Council of 8 April, the purchase will also expand to include bonds guaranteed by the State Treasury as well as Treasury bills.
In addition, under the basic open market operations, every week NBP issues NBP bills worth approx. PLN 80bn. These are surplus funds held on accounts with NBP above the required reserve level. Potentially, banks could use these funds to finance the economy. Another source of bank liquidity could be the use of the repo transactions launched on 16 March 2020. According to end-of-February data, the value of collateral on these operations in the banking system exceeds PLN 340bn.
Taking into account the key role of credit in financing business operations, NBP has launched a bill discount credit programme. Such loans are a favourable and very cheap source of refinancing bank loans extended to companies, thus supporting stable and cheap funding for the enterprise sector.
All in all, NBP has already provided banks with funds sufficient to support activities counteracting the effects of the epidemic, and a manifold expansion of the scale of this financing is still possible. Therefore there is no and there will be no shortage of liquidity to finance anti-crisis measures. Yet it is the task of the government and the public sector to make good use of these funds so that they make their way to honest businesses and households, e.g. all those who are facing economic hardship for reasons beyond their control.
The need to act together
NBP’s current activities are a massive investment which is designed to enable the Polish economy to return to normal operation as soon as possible after the pandemic, thus protecting us against its second-round effects, including an excessive slowdown in price growth and the risk of deflation. The investment will only be effective if it is complemented with simultaneous and adequate measures of all entities responsible for economic and financial policy, including the government and commercial banks.
The banking sector today cannot claim a lack of liquidity as an excuse, as the requirements in this area have also been relaxed. Owing to the interest rate cut and the increase in banking sector liquidity, coupled with large-scale bond purchases, the Polish government has space to finance anti-crisis measures safely and smoothly. Yet in order for this investment to be effective, it is of key importance that all the parties involved promptly launch appropriate activities on a sufficient scale. At the same time, of course, it is necessary to reduce the risk of abuse or diversion of taxpayers’ money to dishonest business people.
The text was first published in Dziennik Gazeta Prawna on 20 April 2020
Announcement of the Governor of NBP, Professor Adam Glapiński to the Polish Press Agency
The spreading coronavirus epidemic is primarily a threat to public health. Therefore, the government is right to take decisive and forward-looking measures to limit the spread of the virus and the risk of subsequent infections. It will be very wise of Poles to stay at home in the near future and radically limit direct contact with other people.
Of course, such measures will cause short-term economic disturbances, because it will be harder for some people to work, some companies will limit sales and the demand for their products will fall. We may also face problems with the so-called supply chain, especially if international transport is partly disrupted. However, such measures, although severe in the short term, will be beneficial in the long run, because they will limit losses in terms of people's health and lives, and thus will also benefit the economy.
We are aware that the situation of enterprises will worsen. This will especially hit transport and some services. We will also be adversely affected by a significant economic downturn in the external environment of our economy, especially in the euro area. Therefore, measures must be taken quickly to reduce the burden on enterprises and people who will be affected by declining income, because they will face a difficult situation, at least temporarily.
It is currently assumed that the impact of the spread of coronavirus on the economy will be temporary and the most severe in the first and second quarter of the year. However, these predictions are subject to considerable uncertainty, as it is difficult to determine how quickly the epidemic will come under control and at what cost.
The main channel through which the epidemic will impact the global and domestic economy is the decline in demand for transport and tourist services and recreation services and culture in the broad sense of the term. The activity of some companies may be restricted as a result of the forced quarantine of employees or the need to stay at home, for example, to look after children. Other channels through which coronavirus impacts the economies of particular countries are the deteriorating business sentiment resulting in reduced purchases of non-food products and the disruption of global supply chains and corporate investment.
Narodowy Bank Polski is carefully monitoring the situation and analysing the need for any measures to be taken. From an operational point of view the most important thing right now is the efficient functioning of the payment system and smooth supply of cash Both of these tasks are carried out smoothly. There is no risk of running out of cash. Currently, it is delivered to commercial banks on an ongoing basis, nationwide, without any delays or restrictions. Due to increased cash withdrawals, in some places, there may be temporary delays in the supply of cash from the logistic centres of commercial banks and cash-handling companies, but there is no question of permanent problems. At the same time, there are no disturbances in the operation of the payment system, which is functioning smoothly and effectively.
The central bank is also monitoring the developments in the economy and in the domestic financial market on an ongoing basis. Despite the turmoil in the global markets, the zloty remains stable and has depreciated only slightly. Similarly, the yields on Polish bonds are low. This is due to the solid foundations of the Polish economy, the absence of imbalances and the positive assessment of the Polish macroeconomic policy by investors.
The major central banks are currently easing their monetary policy by lowering interest rates and some also by providing liquidity to commercial banks and increasing asset purchases. In Poland, banks are not facing liquidity problems. However, NBP is monitoring the situation and if necessary, we are ready to take appropriate measures. In my opinion, the Monetary Policy Council should already support the economy now by lowering interest rates.
At the same time, banks should defer repayment of liabilities for borrowers experiencing a decline in income, which will certainly affect some of their clients. Lowering interest rates is an immediate and direct way to reduce debt costs. Therefore, this is relief for everyone in debt.
By changing interest rates we will not prevent disturbances in supply, nor will we boost demand in the economy in the short term, but we will reduce the burden arising from existing commitments and support the budgets of companies and households, as well as reduce the costs of servicing the public debt. The absence of such measures could exacerbate the problems that will certainly be caused by the spread of coronavirus and the deteriorating sentiment that has already been observed.
At the same time, the decline in demand for non-food goods and services and a sharp decline in commodity prices in the global markets will bring down inflation in the coming quarters below our current expectations. That is why I will suggest the Monetary Policy Council should lower NBP interest rates.
As in other countries, in the current conditions, however, the response from the fiscal policy is also a key measure. I am convinced that the goal of fiscal policy – as that of monetary policy – should be to mitigate the effects of economic losses due to the epidemic and the emergency measures undertaken to stop its spread.
13 March 2020