The central bank should not fire the ammunition too soon. It should not panic, but it should stabilize the economy and the monetary sphere without showing off his ability to act quickly. Make decisions calmly and factually. This raises credibility, trust in the National Bank of Poland—it will need it a lot because the economic crisis will not end soon.
This is a translated (with the permission) and modified version of the article published by Forbes Poland on April 14, 2020.

In this commentary I put the following theses:

The central bank should not panic; it should stabilize the situation and thus affect social moods.
The main goal of the National Bank of Poland (NBP) is 1. to maintain a stable price level and 2. to support economic policy—only when the main goal is not threatened. There is a risk that the NBP does not sufficiently achieve the basic purpose for which it was appointed.
The task of the central bank is not to support the government before elections, but to ensure, above all, the long-term prosperity of society—by caring for the money entrusted to it and in which it has obtained monopolistic powers.

Krzysztof Piech, March 9, 2020

I have already criticized the NBP for not supporting the government’s economic policy by not using the bank’s staff to assist the government in analytical work (in a situation where its primary purpose is not endangered), in preparing economic policy, and draft laws, etc.

Finally, the prime minister has decided to establish—despite the opposition from the head of the NBP—the Polish Economic Institute. It will take many years for the institute’s potential and output to be comparable to that of the NBP. The institute operates and supports the government. This was a minor element of the struggle for influence, because initially the NBP governor informally had a decisive voice in economic matters, so relations with the then finance minister Morawiecki, now prime minister, had to clarify.

NBP policy. It blows boredom, which is good

The positive actions of the NBP include the purchase of gold at the right time (at the low price), as well as the collection of gold from abroad to Poland.

The policy pursued until now, despite media tensions, was characterized by calmness. It was boring, one could say (except for some stubbornness in the fight against “private money”, cryptocurrencies and failure to undertake work, even research, on the central bank’s digital currencies)—and it should be so.

In calm times, with stable inflation, the work of the central banker is relatively boring. However, the real challenge for which the bank has been preparing for years (as long as it does, because looking at the NBP publications and the subject of organized seminars and conferences has not seen such interest in recent years) is to prepare itself and the country’s monetary sphere for recession and even for a crisis.

Of course, some of the supervisory powers were once transferred to the Polish Financial Supervision Authority, and the central bank, despite the efforts of its governor, failed to absorb the PFSA—hence a different solution was introduced in the form of a “personal union”, by appointing the head of the PFSA to the informal assistant of the NBP governor, prof. Marek Chrzanowski, who both worked in the same institute at the Warsaw School of Economics. Later, Chrzanowski resigned and was arrested and Prime Minister Mateusz Morawiecki had to appoint the next PFSA chairman. He has chosen prof. Małgorzata Iwanicz-Drozdowska (also from the Warsaw School of Economics) as his deputy. She is one of the best specialists in the field of banking crises in Poland. A few months ago she has however resigned.

Who prepared the anti-crisis shields if the government lacks economists?

Noting that there are only two economists in the government (out of more than one hundred people), this creates some staffing risks that the Polish financial authorities are not well prepared for the coming crisis. Especially visible is the weakness of the Polish Minister of Finance, whose actual role is minimal.

Minister of Development Jadwiga Emilewicz did what she could while preparing the so-called anti-crisis shields, but her task is to conduct microeconomic rather than macroeconomic policy. Due to this, shield projects lacked a macroeconomic perspective, and thus courage, the scale of activity and financial resources.

Some of the presented activities were appropriate, although they could be better refined—with greater knowledge of business and the perception of its needs. One could, however, have some doubts about the part of macroeconomic policy that concerns the monetary sphere.

This was not changed until April 8, when the Prime Minister and the Governor of the NBP entered the scene of combating the economic crisis and announced a “financial shield” worth about $24 billion. Finally, they supported Minister Emilewicz with macroeconomic actions, while it became obvious that hundreds of microeconomic steps undertaken by her are not enough to overcome the problems caused by lockdown of the economy. This was however slightly too late, as other countries intervened faster.

Interest rate cuts — an expensive gesture

The NBP already reduced interest rates once in March—for the first time in five years. He had good intentions and it is now the banks’ standard response to the crisis. But it was a hasty action because it did not take into account the causes of the crisis.

At the Monetary Policy Council meeting on March 17, 2020:

some Council members were of the opinion that the effectiveness of some central bank activities in supporting the economic situation would be limited in the short term due to the supply nature of current shocks.

This was the opinion of only a few people.

From misdiagnosis, only good luck can get good treatment results. This NBP mistake, moreover, indicated by one of the members of the Monetary Policy Council in public as a departure from the realization of the central objective of the central bank, contributed to the depreciation of the zloty.

The basic reasons for this were different (i.e. falling confidence in many currencies in the world, not to Poland only), but the action of the central bank has deepened this. The consequence will be an increase in prices (of imported goods) and an increase in the cost of servicing franc loans (almost 20% of total mortgage loans in Poland), which, in the situation indicated for years in the public sphere, will cause additional tension and risk for “franc banks”.

I was the first economist in Poland who warned about the rising inflation at the beginning of May 2019 (in this article, later followed by many others).

I was also the first economist in Poland who has said that the drop in prices of oil and of stock markets on March 9, 2020, will be a beginning of a great crisis—see the interview below.

In this interview (in Polish) I noted:

The coronavirus is a pin that caused many speculative bubbles around the world to burst. It will cause a crisis that will last 2–3 years.
The recession, an inseparable element of the business cycle should have already happened and it was postponed through monetary policy activities of pumping money into the economy.

“I have been saying for years that the fact that we had a favorable economic situation should not calm us down. Crises have been and will continue to be.”

There was a belief in Poland that when the recession comes, the GDP growth rate will slow down to about +1%. However, I say that you need to prepare for a 2% drop in GDP, an increase in the unemployment rate to 10% and an increase in inflation—but the Polish economy is not prepared for it.
Polish society is deprived of a safety cushion because the scale of household savings is small (the average household has savings sufficient for only 3 months).
In the situation of an impending rise in unemployment, the Polish economy will lose the basis for further growth, because it was based mainly on consumer demand (and not on investment).
It is the duty of every economic policy to prepare the country for the coming crisis. The Polish economy is however not well prepared for the crisis, because up to now it has been used as a political tool in the electoral struggle, and this should not be the case.

If we speak about inflation only, I have also warned about this recently (in this interview and in this interview). In mid-April, the Main Statistical Office in Poland has confirmed that the high inflation in February (4.7%) was not a one-time episode and it remained higher than NBP’s target (1.5–2.5%) also in March (i.e. 4.6%). Poland and Hungary had the highest inflation rates in the EU in March 2020.

NBPs reaction—to cut rates, again

After the depreciation of the Polish zloty, to save its value, the central bank intervened—for the first time in 20 years. At the same time, it is doubtful whether they were actually shopping “at a favorable exchange rate”, according to the NBP in the statement, because in previous months and years the exchange rate was much better (if it were to be a criterion in favour of a decision of purchasing foreign currencies).

On April 8, 2020, the central bank again cut interest rates, again, to the lowest level ever. This is part of the anti-crisis shield activities. The question arises about the justification of such activity. Were companies in Poland hesitating whether to take a loan? And was the main problem in this respect that the interest rate was half a percent too high? For now, companies in Poland are struggling to survive and it will take more time before they think about increasing their production capacity, for which they would need to take new loans. For now, they needed funds from banks to maintain their current liquidity—which the government decided to provide them within the so-called shield 3.0, promising significant write-offs. Therefore, the interest rate on loans does not matter much.

The reduction of interest rates will not stimulate business activity yet by stimulating real sphere lending. It has a symbolic dimension. And this is an expensive gesture, given the cost of following currency intervention.

The NBP in its statement of April 8 indicated that its purpose is not to stimulate lending, but rather activities of a social nature, ie “mitigating losses of enterprises and households”. It is debatable whether this should be the task of the central bank or the government if such actions could affect the stability of the zloty. This is not the role of the central bank to replace the government in pursuing a social policy. The Bank may help the economic policy but not act instead of the government entering its social policy field.

Another rate cut by the Bank will cause further pressure on the Polish currency to lose value. It had to intervene in the currency market again. The government will also have to spend more money (or budget revenues will decrease, e.g. due to lower VAT incomes) due to rising food prices. I warn against them. After the situation stabilizes, or later—even after a period of panic at the beginning of the coronary crisis (buying out store goods, etc.)—prices may rise again.

The crisis that came from outside

In the case of the crisis of 2008–2009, the then Minister of Finance well noticed that the causes of that collapse are exogenous (“American flu”—as I called it in August 2007, more than a year before the fall of Lehman Brothers or “American disease”, as called in April 2008); that this will not be fought by domestic actions, only. Instead of panicking, as governments of many countries did, they managed to calmly go through the biggest crisis in the world since the 1930s.

Now we have a partially similar situation: the largest crisis since the 1930s is also caused by exogenous factors. We will not eliminate the coronavirus in the world, we will not combat the consequences of the emerging crisis of the American economy, and at most, we can introduce protective measures. Stimulating demand with low-interest rates is not justified yet. It comes more from panic and election calendar (the presidential elections are planned in May in Poland) than from real needs — these are yet to appear. We have to be prepared for the fact that the economic situation will get worse.

As NBP notes in the April 8 communiqué:

“Current forecasts suggest that after the current disruption, the global economic recovery will improve, which will be supported by fiscal measures taken and monetary loosening.”

These forecasts are not up to date when they are formulated, because they are unable to take into account the economic consequences of a pandemic—there are no such economic models. You can only use historical analogies. In this respect, however, prof. Robert Barro calculated that during the famous ‘Spanish flu’ in 1918–1920 inflation caused by it increased by an average of 20 percentage points.

In addition, the global economic recovery may take place in two or even three years. Therefore, from incorrect premises, which are poorly grounded in the results of research, the wrong diagnosis is formulated, the wrong actions are selected, the consequences of which are already partly seen. The biggest problems are yet to come. It will be really bad in the economy; there is nothing to dream of a “V” recession.

The central bank should not launch its ammunition too early, it should not approach the liquidity trap too quickly. He should not panic but stabilize the economy and the monetary sphere without showing off his ability to act quickly, but make decisions calmly and matter-of-factly. This increases credibility, trust in the central bank—and it will still need a lot because the economic crisis will not end soon.

Krzysztof Piech