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National Bank of Poland president eyes Europe cautiously

While much of Europe has struggled over the past few years, the Polish economy has remained resilient, maintaining a sound banking system and hitting its inflation targets. This is why the president of the National Bank of Poland, Marek Belka, is remaining cautious on the topic of eurozone membership, and has no intention of opting into the European banking union.
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National Bank of Poland president eyes Europe cautiously

Q. Poland is celebrating 10 years of EU membership this year. What is your stance on eurozone membership?

A. When considering eurozone membership [for Poland], it has to be pointed out that its potential success depends on various factors: exogenous factors that we cannot control, such as the rebuilding of the euro area architecture, and endogenous factors that we can shape and which comprise of Poland’s institutional environment and policies enhancing structural competitiveness.

Good preparation for the adoption of the euro will help maximise potential [gains] and minimise the risks, which stem from the loss of our independent monetary policy and nominal exchange rate adjustments. The latter have been important shock absorbers in the past, especially during the turmoil [of the 2008/09 global financial crisis].

One also has to acknowledge that functioning under a single monetary policy may be a challenge for a converging economy such as Poland, which points to the necessity of strengthening shock-absorption mechanisms before joining the common currency area. This includes ensuring enough fiscal space and a comprehensive macro-prudential framework. The ability to absorb shocks, both symmetric and asymmetric, should be enhanced by continuous efforts to make product and labour markets work smoothly and enable the effective reallocation of resources.

It is also crucial for Poland to provide an entrepreneur- and innovation-friendly environment. This view is reflected in the Polish strategy for integration with the euro area, which apart from the sustainable fulfilment of Maastricht convergence criteria and technical aspects of euro adoption [also aims to] strengthen Poland’s economic potential.

Q. There have been indications from both Romania and Bulgaria that they are interested in joining the European banking union. Would Poland be interested in doing so?

A. The banking union was initially invented as a crisis management measure for the euro area. From the perspective of Poland as a host country for European banks, we strongly support the creation of the banking union. Conferring supervisory responsibilities to the European Central Bank [ECB] increases the chances of strengthening banks and banking systems in the euro area as a whole.

However, Poland has a sound banking system and a solid national safety net with efficient backstops and a good financial capacity under the deposit guarantee fund. To this end, we don’t perceive opting in as a desirable stabilising factor for our domestic financial system.

We have to consider that opt-in countries, as opposed to their partners from the euro area, don’t have equal rights in the banking union. The first area of inequality is the limited influence on the decision-making process, as final decisions are taken by the ECB governing council, where representatives of opt-in countries are not present.

The second issue is the fact that opt-in countries don’t have access to fiscal backstops, i.e. the European Stability Mechanism and liquidity support from the ECB. In this context, we are aware that the ECB will support centralised capital and liquidity management for the groups at the top-level of consolidation within the Single Supervisory Mechanism. This means that in case of supervisory failures at the pan-European level, opt-in countries have to deal with the implications on their own.

Last but not least, we have to take into account two further building blocks of the banking union. The Single Resolution Mechanism is not ideal, as the decision-making process is complicated and the funding mechanism is not mutualised from the start. We also perceive the lack of a common deposit guarantee system as a shortcoming.

Q. The new European banking sector stress tests include a scenario related to exposure to central and eastern Europe [CEE]. What are your views on this and were you consulted before?

A. The European stress test is a broad exercise aiming to cover risks relevant to all countries in the EU. The scenario was developed with important input from the European Systemic Risk Board, where authorities from all countries of the EU had an opportunity to present their views.

One of the initial shocks considered in the stress test is a reversal of the currently benign risk assessment by market participants, with potentially wide-ranging consequences for financial markets. One of the consequences considered was a depreciation of CEE currencies. We agree, in general, with the severity and the scope of the scenario, as it is not materially different from the scenarios used in our own stress tests run for the Polish banking system.

Looking at the results of our own stress tests and the current condition of the banking system in Poland in particular – its sound profitability, good capital adequacy and low leverage – we are confident that the Polish banking system is able to withstand a negative economic scenario such as the one specified in the stress tests and continue to operate safely.

Q. Poland very successfully hosted the annual meeting of the European Bank for Reconstruction and Development in Warsaw in May 2014, during which the country received a lot of praise for its recovery. What is your economic outlook for the medium term?

A. According to Polish Central Statistical Office estimates for the second quarter of 2014, economic growth in the country stabilised at 3.3% year on year. National accounts data points to favourable economic growth with a strong rebound in domestic demand.

In the short and medium term, gross domestic product should continue to grow at the pace observed in the first half of 2014, thus remaining below the long-term average from the period preceding the financial crisis.

Negative signals from the external environment – i.e. lower-than-expected growth in the euro area, in particular in Germany, in the second quarter of 2014, as well as slightly less optimistic outlook for these economies, together with the escalation of the Ukraine-Russia conflict – indicate that GDP growth in Poland might be lower than estimated in the National Bank of Poland [NBP] July projection.

Against the background of the slight increase in foreign demand expected in the medium term, a stimulus for output growth will be provided by the inflow of EU funds, especially those earmarked for investment. In 2016, however, as the settlement of the EU 2007 to 2013 financial framework is completed, the inflow of EU funds will ebb, putting a drag on growth of domestic demand. Economic growth will also be supported by the historically low NBP interest rates.

In the years 2015 to 2016, the upward pressure on prices of the main components of the consumer goods and services basket [core inflation, food and energy prices] should increase. Yet, owing to modest GDP growth, consumer price index inflation will remain relatively low, staying below the NBP inflation target throughout the projection horizon. Factors conducive to restricted inflationary pressure will also include stable commodity prices in international markets, dragged by slowly expanding global demand and rising supply of oil and shale gas.

Q. What is your inflation target and your interest rate strategy?

A. The NBP’s inflation target is – and has been for more than a decade now – 2.5%. Given that it is virtually impossible to hit the 2.5% inflation target month in, month out, the point target is complemented by a symmetrical band for deviations of plus or minus 1 percentage point. This helps us communicate that the NBP is committed to keeping inflation on target over the medium term while the symmetric nature of the band reinforces our commitment to fight deflation as vigorously as excessive inflation.

I am proud to say that despite the turbulence of the past decade, inflation in Poland has averaged 2.7% over the period, which is very close to our point target, and underscores that we have indeed delivered on our promise to maintain price stability.

The NBP’s interest rate strategy is to keep market interest rates at a level that is consistent with achieving the inflation target over the medium term and supporting balanced economic growth. The NBP intervenes directly only in the shortest segment of the yield curve by setting the rate on its weekly open-market operations. The medium- and longer term rates, as well as yields on different asset classes, are influenced only indirectly through interest rate arbitrage.

Marek Belka is the president of the National Bank of Poland and former prime minister and finance minister of Poland.

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