Prof. Adam Glapiński, Prezes NBP (Fot. NBP)
Mr. President, what can be said about 2020 from today’s perspective?
President 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.”
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?
“Our experts estimate that in these two years total GDP will be 1.4 percentage points higher thanks to our actions.”
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.
“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 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.
“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.”
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?
“The baseline scenario for 2021 is a gradual economic recovery and inflation running in line with the NBP target.”
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.”
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.
“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.”
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?
“Narodowy Bank Polski simply does what Polish citizens expect it to do – it provides them with wide and safe access to cash.”
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