IMF: We have welcomed the initiation of the tightening of monetary policies early in the Fall

We have welcomed the initiation of the tightening of monetary policies early in the Fall. Determining an “optimal” timing of the decision to change the monetary policy stance is difficult - says Alfredo Cuevas, economist at IMF, in an interview for Obserwator Finansowy.
IMF: We have welcomed the initiation of the tightening of monetary policies early in the Fall

Alfredo Cuevas, International Monetary Fund (©IMF)

The decision is difficult especially when it comes to exiting a period of stability in interest rates, as the monetary authorities need to feel sufficiently confident that they will not have to reverse course soon, while also trying to avoid waiting too long – says economist IMF.

Obserwatror Finansowy: The IMF has completed an assessment of the Polish economy as part of its annual mission. What is the current inflation situation in Poland? Why are prices rising and when will inflation begin to fall?

Alfredo Cuevas: Like many other countries, Poland is facing a surge in inflation. There have been some common drivers of inflation in many of these countries, such as disruptions in the normal operation of international value chains and steep increases in the prices of energy. In addition, demand is growing strongly in many of these countries. The rapid and significant increase in inflation creates the risk of de-anchoring inflation expectations and of generating a more persistent inflation process, which is the reason monetary policy authorities in many jurisdictions are taking action even if they consider that some of the immediate drivers of the ongoing inflation surge are not necessarily responsive to monetary policy actions. In our more recent forecast, published with the concluding statement of our mission this past December, we were seeing 12-month inflation coming back near the target by the end of 2023. We are in the process of incorporating more recent information into our forecasts, which will be published in our staff report in February.

The IMF estimates that inflation in Poland will enter the corridor in 2023 (2.5% +/- 1 pp) and will most likely reach the target in 2024. What are the threats to these forecasts?

The forecast is subject to upward and downward risks. It is especially important to monitor the evolution of energy prices and the persistence of supply-side disruptions. Also, wage settlements, which should not get ahead of productivity growth in real terms. If the settlements run too fast because people and businesses expect inflation to persist, or because of excessive tightness in the labor market, this could itself contribute to prolong inflation pressures. And we should not forget that the past two years have shown that sometimes there are risks we cannot see in advance (the so-called “unknown unknowns”), which can turn out to be quite important when they become visible.

Has the National Bank of Poland made a timely decision to start a cycle of interest rate increases in order to fight rising inflation expectations?

A year ago in our 2020 art. IV staff report we recommended caution exiting the period of monetary accommodation to ensure that the removal of support was not premature, and we also suggested “seeing through” temporary supply shocks. We monitored inflation and activity throughout the year, and the signals coming from the data gradually changed. In particular, we noted in the first half of the year that different core inflation measures were growing at significantly different rates, with median type indicators such as the trimmed means measure remaining moderate, which suggested that inflation pressures were not broad based yet. However, this began to change in the second half of the year, with an increasing number of indicators of core inflation showing readings above the NBP’s target during the Summer months. That is, taken as a group, these indicators began to make it more advisable to tighten monetary policy, while at the same time the recovery remained strong. So, we have welcomed the initiation of the tightening of monetary policies early in the Fall. Determining an “optimal” timing of the decision to change the monetary policy stance is difficult, especially when it comes to exiting a period of stability in interest rates, as the monetary authorities need to feel sufficiently confident that they will not have to reverse course soon, while also trying to avoid waiting too long.

The financial market is predicting the interest rate in Poland will increase to 3% in the current cycle. Would that be the correct level?

The markets will always “take a view” figuratively speaking of where the interest rate will be at some point in the future. But one must remember that monetary authorities meet often, every several weeks, to assess the monetary policy stance in the light of the most recent developments in the real economy and the financial markets and their impact on the forecast for inflation over the relevant policy horizon. The reason central banks meet often is to incorporate these flows of new information into their decisions.

Before Poland and Central European countries started buying assets, it was not entirely clear whether the smaller central banks, with the exception of the Fed and the ECB, could afford the assets. How was this test in the case of Poland?

The NBP’s asset purchase program was a successful test. The program was maintained in place for more than a year, but its first several weeks were really the crucial ones. The program was launched at a moment of heightened uncertainty and volatility in markets and had the aim of bringing order to these markets. It amply achieved this goal, which allowed the NBP’s decision to reduce the policy interest rate to have its intended effects on the economy.

The IMF is now recommending the submission of a pandemic bond portfolio management plan. Why is this so important, taking into account the relatively small scale of purchases in Poland and how is it solved in the largest central banks?

The overall size of the portfolio is smaller than that of major central banks which have engaged in asset purchases, but it is far from negligible. We think that it is good practice to indicate in advance what the NBP will do with its portfolio when the securities begin to mature. In fact, other central banks do so. For example, in its December 2021 policy announcement the ECB indicated its intention to reinvest the principal payments from maturing securities purchased under the PEPP (its pandemic purchase operation) until at least the end of 2024. The Governing Council also has indicated what it intends to do about maturing securities purchased under the Asset Purchase Program.

Will the recommendation that Poland avoid expansive fiscal policy, since NBP has tightened monetary policy, be correct if the new variant of the coronavirus forces the economy to at least partially shut down?

We think that in the baseline scenario of continued strong economic growth there is no need for an expansionary fiscal policy stance. But if risks to economic activity materialize as a result of a new development in the pandemic the advisable course of action would be for fiscal policy to offer support which is targeted to those sectors or individuals most affected and to ensure an adequate health policy response. There is still sufficient “fiscal policy space” to do these things.

The IMF forecasts Poland’s GDP growth in 2022 at 4.5%, and in the medium term in 2023-26 at 3.25%. How does the IMF assess Poland’s potential product? Is 3.25% too low? And what would Poland have to do in order to develop faster?

The rate of growth of 3.25 percent that we forecast is not too low, in the sense that it would be consistent with the continuation of Poland’s convergence within the European Union. It also must be noted that behind that particular forecast most of the drive is expected to come from investment and overall factor productivity growth. The 3.25 percent figure does not depend much on growth in employment or the “labor factor.” That is a result of projected demographic trends—notably the projected small decline in the economically active population. In other words, our forecast of potential growth five years out can be taken roughly as a view on the expected rate of growth of output per worker in a stable environment. From that perspective, it is not so different from what was observed, say, in the previous decade. In any case, to ensure a robust rate of potential growth it is important to maintain a favorable environment for investment and to continue investing in people’s education and skills. In addition, actions to incentivize labor force participation and to provide more stability to the employment of foreign workers could help offset, at least for a time, the effect of the demographic trends mentioned earlier.

What do you consider to be the greatest challenge for central banking and monetary policy in the medium and long term, both in the region CEE and worldwide?

In the near term, of course, the main challenge for many central banks around the world is to prevent elevated inflation from becoming entrenched while avoiding undesirable side effects of their actions against inflation. But looking beyond that, I will mention two challenges which have been much discussed lately: climate and digitalization. Central banks are stepping up their analysis of the exposure of financial intermediaries’ balance sheets to climate risk, understood broadly to include risks of disruptive climate change as well as large movements in energy markets, which could themselves be driven by policy or technological developments. This is an area where some central banks in Europe, such as the central bank of the Netherlands (DNB), are at the frontier of the development of new surveillance tools. It is also an area of very active work at the IMF in collaboration with other international fora—and we are now covering some of these issues in our FSAP missions (“financial sector assessment program”). Digitalization includes items as diverse as the challenges raised by the emergence of “stablecoins,” the growth of cryptocurrencies, debates regarding the advisability and design of central bank digital currencies, the presence of so-called “BigTechs” in financial markets, new electronic payment systems, and so on. All of these activities, actors, and assets give rise to new and complex policy questions, challenging central banks to keep up with the rapidly evolving environment. In both these areas (climate and digitalization) there are data gaps, and one starts from a very basic question: what do policy-makers, supervisors, and regulators need to know, and what information do they need to collect? This again is a task where the IMF is very active in support of its membership, including through our FSAPs and technical assistance programs. I encourage your readers to go to our webpage,, and explore the essays on these questions written by our staff, such as this recent post on cryptocurrencies by the director of our Monetary and Capital Markets Department.

– Interview by Maciej Danielewicz


Alfredo Cuevas heads the Poland and Baltics Unit in EUR and is the mission chief for Poland and the Netherlands. Prior to that, he led the Portugal mission team in EUR, the Brazil team in the Western Hemisphere Department, and headed the Regional Studies Division in the African Department, where he coordinated the Regional Economic Outlook for sub-Saharan Africa. Mr. Cuevas spent several years at the IMF’s Fiscal Affairs Department, working on social security reform and fiscal federalism. Outside the IMF, he has been a senior economist in the Research Department of the Mexican Central Bank and has taught public finance at El Colegio de Mexico. Mr. Cuevas holds a Ph.D. in Economics and an M.A. in Public Affairs from Princeton University in the U.S., and a B.A. in Public Administration from El Colegio de Mexico in Mexico City.

Alfredo Cuevas, International Monetary Fund (©IMF)

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