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
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