Our GDP, the most simplified measure of economic growth, increased by 53.9 per cent in real terms between 2010 and 2022, with the bulk of that growth, as much as 37.7 per cent, occurring over the past eight years. This spectacularly rapid growth followed a shift away from a neo-liberal vision of the economy towards broad-based state interventionism and concern for the family.
/>
After the illusory and, as it turned out, negative experiences of Thatcherism1 and Reaganomics2 other European Union countries have acted similarly to Poland. In 2010, the European Commission launched – as one of the seven flagship initiatives of the Europe 2020 strategy – the European Platform against Poverty and Social Exclusion. The only regret is that Poland embarked on this path so late.
Directly, no, because this is the government’s domain. Indirectly yes, because ensuring lower inflation and the credibility of the Polish currency is at the same time ensuring the country’s economic development. After all, an additional objective of NBP is to support the economic policy of the government, as long as this does not jeopardise the primary objective of the central bank. There is nothing extraordinary about this. All major central banks during periods of stress and shocks that disrupt the normal functioning of the economy have and will continue to support the efforts of the state administration.
Large-scale asset repurchase programmes implemented by the European Central Bank after the subprime crisis3 and during the corona crisis are examples of such large-scale measures. At the time, NBP also ran an asset purchase programme. However, both the ECB and NBP have never directly financed governments or entities operating in the real economy. This is prohibited by the Treaty on the Functioning of the European Union, in the case of Poland additionally by our Constitution and the Act on NBP.
Through monetary policy instruments, the central bank influences commercial monetary institutions, which, through the size of lending, affect money creation, which in turn affects domestic demand. A high reference rate makes access to credit more difficult and consequently freezes investment and the economy, resulting in a decline in domestic demand. This is the situation we have been facing in Poland since January this year; GDP growth is currently low because domestic demand (not fuelled by credit on the same scale as in previous years) is declining, retail prices have not been rising for several months or are even falling, and inflation is returning to its target level, i.e. the level desired for a particular type of economy at a particular stage of its development.
Maintaining price stability, which is the central bank’s responsibility, has not been an easy task in recent years.
It must be emphasised that price stability understood as zero inflation is impossible in a growing economy, primarily because investment-related income always outpaces supply effects. Importantly, inflation is often considered to be an inherently bad thing. This does not have to be the case. Moderate, controlled inflation plays a similar role to rain in agriculture; without rain, nothing will grow. From this point of view, deflation is more dangerous than moderate inflation, even if it is persistent.
A recently published study by American proponents of the Keynesian doctrine4 concludes that high and dangerous inflation only occurs after extraordinary events of the kind we have recently experienced: epidemics on a global scale, shocks to major commodity markets, war. Here monetary policy will not fix anything. It can only hold back growth until the economy, through its homeostatic5 properties, returns to relative equilibrium.
The assessment of the inflation rate is affected by the methodology used to measure and report price increases. Without going into complicated descriptions of the methodology, it is worth noting that in Poland, for example, prices (in aggregate terms) were the same in September this year as they were four months ago, while the CPI (Consumer Price Index), which depicts changes in the price level relative to the same month of the previous year, is still high; according to preliminary estimates from Statistics Poland, it amounted to approximately 8.2 per cent. Unfortunately, monetary policy is not retroactive; it cannot eliminate either the effects of pandemics or shocks to energy and commodity markets. Hence, even if prices have not risen in recent months, the annual price index taking into account price changes from a few months ago may still be elevated.
From March 2015, when the Consumer Price Index (CPI) was briefly below the lower limit of the range set for inflation target, Narodowy Bank Polski took a wait-and-see approach in its monetary policy and kept interest rates relatively high and stable, relative to other major central banks. At the first meeting of the Monetary Policy Council after the lockdown announcement (17 March 2020), in order to reduce the risk of borrower default, the MPC began a cycle of reductions in key interest rates to historically low levels.
From 28 May 2020 until 6 October 2021, NBP reference rate was 0.10 per cent; the Lombard rate was 0.50 per cent; the deposit rate was 0.00 per cent; the bill rediscount rate was 0.11 per cent; and the bill discount rate was 0.12 per cent. At the same March meeting, the MPC lowered the reserve requirement rate to the minimum level permitted by law (0.5 per cent), while at the same time raising its interest rate by 50 basis points (to 1.00 per cent), mainly with a view to the financial health of banking cooperatives.
NBP tightened monetary policy ahead of the Federal Reserve, the European Central Bank, the Swiss National Bank, and the Bank of England. In the period from 6 October 2021 until 7 September 2022, the Monetary Policy Council, in a cycle of eleven increases, raised NBP reference rate from 0.1 per cent to 6.75 per cent, making appropriate changes to other monetary policy instruments as well. The fight against inflation has been carried out cautiously so as not to squander the opportunity to implement ambitious development and social programmes that are rapidly narrowing the gap between us and the wealthier parts of Europe. The staggered cycle of increases in the cost of money has given our businesses time to adjust to operating in a more difficult environment without undue fear of losing liquidity, while at the same time dampening demand pressures in the economy.
As everything has been pointing to an easing of inflationary pressures for several months, at the meeting on 5 and 6 September this year, the MPC eased monetary policy, taking into account both external conditions and the situation in the credit market. However, it is difficult to predict what will happen in the coming weeks and months. We have too many unknowns to solve this equation.
This is a very broad topic, so let us confine ourselves to the cost of government intervention during the coronacrisis and the resulting burden on the public finance sector. The European Union countries (27) together with the UK have spent more than one trillion euros on rescue packages, including Poland with roughly EUR 40 billion. As a result, many millions of jobs were saved and the economy quickly returned to growth. Just as importantly, this is sustainable growth, which is scrupulously examined annually by the relevant bodies of the European Union.
Inflation was triggered by external factors, which took the form of demand and supply shocks. It is clear from Eurostat data that social transfers have had no impact on inflation in Poland. From 2015 to 2022, consumption in the household sector grew by 25.7 per cent (around 6 percentage points less than GDP) and private consumption as a share of GDP fell from around 58.9 per cent to around 56.8 per cent. The social policies implemented after 2015 were characterised by the fact that, with average disposable per capita income rising faster than the cost of living, the incomes of the less well-off grew at a higher rate than those of the well-off. This is attributable to minimum wage increases, the introduction of a minimum hourly wage, and the relatively high indexation of pensions and social transfers. From 2015 to 2022, disposable income per person in a household increased by 62.3 per cent and expenditure by only 35.2 per cent, meaning that some of the wealthier households refrained from consumption, financing through savings, directly or indirectly, investments, without which growth in the economy is not possible.
That is to say, we have been expanding at a rate that has allowed us to steadily raise living standards for all citizens, without jeopardising our ability to pay our bills or invest in things like national security, culture, or environmental protection.
Poland is one of the least indebted countries in the European Union; according to Eurostat methodology, our public debt does not exceed 50 per cent of GDP. There are therefore no risks of not being able to service this debt. By the way, I would like to point out that roughly two thirds of this debt is in Polish hands. What does this mean? Only that Polish households and businesses that have purchased treasury bonds (because that is the form of Polish public debt) will receive interest from the Treasury on this, and a return of the savings invested when the time comes for redemption.
This interview took place on 14 September 2023.