Interview with Professor A. Glapiński, Governor of NBP for Interia.pl

“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