Text by President of NBP, Prof. Adam Glapiński, for the “Polski Kompas 2020” annual:
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.
President of NBP, Prof. Adam Glapiński